Though it is not well-publicized, the Santa Clara County Recorder’s Office has a policy of delaying the recordation of a Deed where the transferor claims a transfer tax exemption under subsection (d) of section 11925 of the California Revenue & Taxation Code (i.e., the transfer “results solely in a change in the method of holding title … and in which proportional ownership interests … remain the same immediately after the transfer.”). To the unaware, this policy could have significant consequences.
As described in an April 25, 2007 Memorandum issued by the County, due to the complexity of subsection 11925(d) transfers, the County advises submission of certain supporting documentation 5 days in advance of the recording date. Of course, those poor souls who have not read this Memo and are otherwise uneducated about this process will be caught unaware … then be forced to gather the required documentation, supply it to the Recorder, and wait. Such delays can have real consequences.
For example, suppose a group of individual investors get a great price on a large commercial property in Sunnyvale in a quick-turnaround, all-cash deal. Next, the group wants to pull the majority of their money out, so they obtain a commitment on favorable terms for a non-recourse loan to an LLC they’ve formed to hold the property … and the commitment is good through Friday. The investors don’t submit the Deed for the individuals-to-LLC transfer to the Recorder until the Wednesday before, and since they have (properly) claimed an exemption under subsection 11925(d), the Recorder places a hold on the Deed. This leaves the group with a choice from the following unenviable alternatives: (i) pay the tax ($1.10 per $1,000 of value transferred) and later try to secure a refund from the County, (ii) cancel the transfer and take out the loan in their personal capacities, or (iii) lose the loan. The obvious solution: submit the Deed and required documentation well in advance. But what does “well in advance” mean? And what is the required documentation?
Those answers will depend on the situation. The County’s Memorandum is extremely vague about the required documentation. It indicates a 5-day review period, but that cannot be relied upon in a situation where it is uncertain exactly what documentation is required.
The best advice may be as simple as this: submit the Deed with the appropriate documents to demonstrate that the 11925(d) exemption applies, whatever those documents may be, and accompany those documents with an explanatory cover letter, or “roadmap”. The cover letter should also give a contact with whom the Recorder can follow up for additional information. Of course, title companies will already be involved in many cases, and parties should look to them for guidance in such cases.