Ground Leases and DC Transfer Taxes: DC Court of Appeals Clarifies Sale‑Leaseback Liability

The case arose from a complex 2013 property transaction in which Lano/Armada Harbourside, LLC sold five condominium units on K Street NW to Allegiance 2900 K Street LLC for $39 million. The “Bargain and Sale” deed stated that Lano/Armada was retaining a “leasehold interest” in the improvements, referencing a separate ground lease between the parties that identified Lano/Armada as the “Ground Lessee” and Allegiance as the “Ground Lessor.” This ground lease was executed the same day and included a potential term of up to 117 years and substantial rent obligations. (This type of transaction — a sale-leaseback — allows the seller, who becomes the lessee, to raise capital for the development of the property without assuming more debt.) However, when reporting the transaction for tax purposes, only the sale was disclosed. The ground lease was not mentioned on the tax return, and no taxes were paid in connection with the leasehold interest.

In 2019, following a default and foreclosure, the District’s Recorder of Deeds refused to record the foreclosure deed until the ground lease was recorded and the associated taxes were paid. Commonwealth Land Title Insurance Company, having paid over $1 million in taxes under protest, initiated litigation, contending that the ground lease was not a separate taxable event or, alternatively, that the statute of limitations for tax collection had expired.

The principal issues before the court were whether the parties could avoid DC’s tax laws by characterizing the ground lease as a “retained” interest rather than a new transfer, and whether the statute of limitations barred the District from collecting taxes, given that the 2013 return referenced a ground lease but omitted essential details.

The court held that the ground lease constituted a separate, taxable transfer, regardless of how it was described in the deed. With respect to the statute of limitations, the court determined that the 2013 return did not trigger the limitations period because it did not identify the ground lease as a taxable event or provide sufficient information for the District to assess the tax. Accordingly, the District was entitled to collect the taxes in 2019.

Under DC law, any transfer of real property or any interest therein, including long-term ground leases, is subject to transfer and recordation taxes. Merely labeling an interest as “retained” does not alter this requirement. Furthermore, to commence the three-year statute of limitations, a tax return must specifically identify the taxable event and provide sufficient information for the District to assess the tax. A vague reference in a deed is insufficient.

The court explained that a leasehold interest cannot be “retained” unless there is an actual lease, and a party cannot lease property to itself. The 2013 Deed did not create a leasehold; rather, it set the stage for the separate Ground Lease, which constituted the actual transfer. As a result, there were two taxable events, not one.

Regarding the statute of limitations, the court noted that the 2013 return addressed only the fee transfer and not the leasehold. The return did not include information about the lease’s duration or rent, leaving the District without notice of a taxable ground lease. The law requires more than a passing reference to initiate the limitations period.

Ultimately, the Court of Appeals affirmed the decision of the lower court. The ground lease was a separate, taxable transfer, and the District’s 2019 tax assessment was timely, as no proper return for the leasehold had previously been filed.

The key takeaway for parties structuring real estate transactions in the District of Columbia is that a ground lease with a term of 30 years or more creates a separate taxable event, regardless of how it is described in the deed.

The court’s decision exposes parties to potentially unlimited retroactive tax liability for long-term ground leases that were not separately recorded or reported, even if the parties believed in good faith that their transaction structure complied with the law. Because the statute of limitations does not begin to run until a specific ground lease tax return is filed, transactions from many years ago remain perpetually open to assessment. This lack of finality can be particularly harsh for successors-in-interest, lenders, and title insurers who may have had no involvement in the original structuring or filing decisions. The cumulative effect also imposes a significant — and seemingly unfair — tax burden on parties considering a sale and leaseback as the same parties are faced with two rounds of recordation and transfer taxes.

Case: Commonwealth Land Title Ins. Co. v. District of Columbia, No. 24-TX-0219 (DC Ct. App. Sept. 25, 2025)