Question: When is a private transaction not a private transaction?
Answer: When the deal has important public ramifications that affect other people’s lives. And, with that, the case should be closed.
The issue comes up periodically, and most recently with the $7 million purchase of a building at the corner of Perry and Illinois streets. Terry and Kim Pegula, whose Buffalo Sabres play across the street at KeyBank Center, bought the Cobblestone District building through a complicated transaction that their lawyers say should have kept the price a secret.
It’s not an uncommon strategy among business leaders who, for personal or competitive reasons, don’t want the details of such purchases made public. It’s not hard to understand their perspective, but the fact is, the public has compelling reasons to know those costs because they influence the tax bills of other properties.
In this case, the Pegulas’ purchase was structured not as a common arms-length transaction, but as one business purchasing another. In that way, a lawyer for the Pegulas says, the cost should have been kept private.
It worked like this: Three members of the family selling the five-story building each created a limited liability company. Those three LLCs then transferred the property to a fourth LLC, which the Pegulas then acquired.
When the deeds were transferred among the LLCs with common ownership, they were each recorded as a $1 sale. But because the Pegulas still had to pay the state and county “transfer tax” – which was based on the actual costs – it was simple to calculate the price, which was reported in a public document.
Shortly after The Buffalo News reported details of the sale last month, a lawyer from Hodgson Russ emailed the Erie County Clerk’s Office, protesting that the information was on the office’s website. There the dispute remains, as the Clerk’s Office seeks official guidance on how to handle such transactions.
This kind of a transaction is entirely legal and is designed to allow some buyers to mask the cost of a deal. As a matter of course, businesses – or most individuals, for that matter – don’t want to make such information public. If, for example, they wanted to buy other nearby properties, secrecy gives them a negotiating advantage. It’s understandable and not all that uncommon.
But there are other important considerations. The cost of buying a property affects municipal assessments and fair-market appraisals. As properties become more valuable, an entire area can see increases in property taxes. The only way to know if any given property’s taxes are in line is to know the value of others and that, to a great extent, depends on what a buyer is willing to pay for a property.
That information has to be made public and, like pregnancy, there is no such thing as being a little public. It is or it isn’t. In Dutchess County, the staff of County Clerk Bradford Kendall does the job by disclosing the amount of transfer tax paid. Anyone competent in elementary math can then puzzle out the sale price.
Whether that policy remains in effect will depend on what the State Department of Taxation and Finance decides based on the uproar emanating from downtown Buffalo. One way or another, though, such information is crucial not just to a fair tax policy, but to public confidence in its fairness. That is essential.