July 28, 2005

When the General Assembly, in 1986, closed a tax loophole, the lawmakers didn't close it tight enough. As a result, a $78 million real estate deal has managed to squeeze through and state and county coffers will be out about $1.5 million apiece.

Moreover, the heirs of the late John Rollins apparently have won the final battle in the war over development of Brandywine Town Center two years after they sold the controversial property.

Actually, according to the Delaware Supreme Court, they didn't sell the property.

In a ruling handed down on Jul. 21, Chief Justice Myron Steele held that, although three subsidiaries of Acadia Reality Trust ended up owning the property, what might have looked like a real estate sale and figuratively quacked like one wasn't one.

It was a 'reverse merger' and therefore not subject to state and county realty transfer tax, Steele ruled.

"We recognize that the Rollins and Acadia entities here carried out a transaction that, once completed, resulted in the indirect exchange of real estate for cash. Acadia Realty, through the Acadia [subsidiaries], received an interest in property beneficially owned by entities connected with the Rollins family. Once the survivor [corporations] gained title to the property, [they] immediately cashed out the Rollins' newly-acquired ownership interest, leaving Acadia Reality as the sole beneficial owner," he wrote.

He went on to hold, however, that that did not constitute the kind of 'abuse' that the Assembly sought to remedy when it exempted corporate mergers which involve real estate assets from having to pay realty transfer tax.

The exemption, he found, was intended to prevent a person from forming a company in which he or she was sole owner, transferring real estate to that company and then selling it to someone else. In the Rollins-Acadia deal, the merger involved existing corporations, at least on the Rollins side, which had other legitimate purposes.

In a September, 2004, judgment, Superior Court judge William Carpenter held that "it would be folly to try to argue that [the Rollins-Acadia deal]  is anything more than a legal procedure intended to transfer real estate properties."

Carpenter based that conclusion on timing of the transaction, the complete change of ownership it involved, the short duration after the transaction during which Rollins interests retained partial ownership of the property, and "the business purpose surrounding the merger."

Steele reversed Carpenter's ruling.

As outlined in Steele's opinion, the deal went like this:

Acadia Realty, a publicly traded company which owns and manages shopping centers nationwide, was interested in the Brandywine Town Center when Rollins's heirs put it on the market. It therefore formed three wholly owned limited liability corporations as counterparts to the three Rollins companies which collectively owned the property.

In January, 2003, the three Acadia companies were 'merged into' the three Rollins companies. Although the Rollins entities were survivors in the deal, their names were changed to those the then-liquidated Acadia companies had. At that point, the companies bought out the Rollins heirs.

Acadia paid $1,171,094 in reality transfer taxes to both the state and New Castle County and filed suit in Superior Court to get the money back. Based on the combined tax rate of 3%, the amount paid indicates the deal was worth $78,072,933.

According to Michael Strine, the county's chief financial officer, Steele's ruling means that both the county and state will have to refund the amount of the tax and pay Acadia an additional $292,774 apiece in interest.

Brandywine Town Center was built after a prolonged controversy. County Council rezoned the property, which formerly was the site of  Brandywine Raceway, a racetrack, over opposition from several Brandywine Hundred civic associations and residents. Before the development plan was approved, the objectors managed to force inclusion of several deed restrictions controlling the appearance of the retail center.

In an authorized biography, John Rollins, who reveled in being a self-made successful businessman and political kingmaker, characterized getting Town Center approved and built as winning a fight for a cause.

2005. All rights reserved.

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