Our company is financing its new world headquarters condominium unit through a 'synthetic lease' -- an off-balance-sheet structure where a bank trustee will take legal title to our unit and lease it back to us, even though for tax and financial-risk purposes we remain the true owner and the arrangement is really just a loan secured by the property. The building is being constructed by a multi-member LLC that will convert to condominium ownership, with each member beneficially owning only its own unit from day one. (1) Is the trustee's taking title, and our unit's eventual reversion to us, subject to real estate transfer tax? (2-4) Are the lease itself and the various loan-related conveyances exempt as financing? (5-6) Does recording the trustee's deed, and the various related mortgage documents, trigger mortgage recording tax, and if so on what amount?
Apply this to your situation
This page answers the general question as of 2001. Ezel answers yours, under current New York tax law, with citations.
Plain-English summary
Time Warner Inc. ("TWI," later a subsidiary of AOL Time Warner following the parties' merger) planned to locate its world headquarters in an approximately 800,000-square-foot condominium unit (the "TWI Unit") in a multi-use development (the "Project") adjacent to Columbus Circle in Manhattan -- the building that became known as the Time Warner Center. The Project's other units -- Hotel, Residential, Office, Retail, Garage, and a donated auditorium unit for Jazz at Lincoln Center -- were being developed alongside the TWI Unit by a group of members who together formed Columbus Centre LLC ("LLC"). Because it wasn't practically possible to convey individual condominium units before substantial completion of construction, the LLC held title to the whole Project during construction, but its Operating Agreement made explicit from day one that each member -- including TWI, as the beneficial "TWC Member" -- was the sole beneficial owner of its own unit, receiving all of that unit's income/gain/loss/deductions and bearing all its obligations, with no cross-ownership between members' units.
The synthetic lease structure. To finance its roughly $120 million share of the land acquisition cost (and later, permanent financing for the completed unit), TWI used a "synthetic lease" -- an off-balance-sheet financing technique. Under it, State Street Bank and Trust Company, acting solely as Trustee ("SSBTT"), was nominally admitted as a nominal "Member" of the LLC holding TWI's membership interest, and would take legal title to the TWI Unit once the condominium declaration was filed. SSBTT would then immediately lease the Unit back to TWI under a triple-net "Lease," with "Rent" payments calibrated to exactly equal the interest/yield and principal owed to outside Lenders and Certificate Holders ("Participants") who funded SSBTT via a Participation Agreement. TWI (not SSBTT) controlled construction and design (via a Construction Agency Agreement), bore all risk of loss, and held a Purchase Option to acquire the Unit at any time for a "Purchase Amount" equal to the outstanding financing balance -- an option TWI was, as a practical matter, extremely likely to exercise (the Unit was custom-built as TWI's branded world headquarters). Crucially, every governing document -- the Lease, the Participation Agreement, the LLC Operating Agreement -- explicitly stated that, for all tax and bankruptcy/receivership purposes, the transaction is a financing directly from the Participants to TWI, that beneficial ownership of the Unit remains with TWI throughout, and that SSBTT holds title only as security for TWI's repayment obligations.
RETT: both deemed legs of the SSBTT Deed are exempt. The Department held that the deed conveying the TWI Unit from the LLC to SSBTT (the "SSBTT Deed") is, in substance, two stacked transfers: (1) a deemed conveyance from the LLC to TWI, and (2) a deemed conveyance from TWI to SSBTT as security. Leg (1) is exempt under §1405(b)(6) as a mere change of form with no change in beneficial ownership -- TWI was always the LLC Operating Agreement's designated beneficial owner of the TWI Unit, just as the other members were of their own units (following the same condo/co-op conversion doctrine as the Department's other rulings on multi-member LLC-to-condominium conversions). Leg (2) is exempt under §1405(b)(2) as a conveyance used to secure a debt, directly analogous to the RETT regulations' industrial development agency (IDA) financing examples, where neither the borrower's conveyance of title to the lender-titleholder, nor the lender's eventual reconveyance back to the borrower, is taxable -- because in both structures, the "lender" acquires title purely as security, payments styled as "rent" are really debt service, and title reverts to the true owner at the end. For the same reason, the Lease itself is exempt (it's just another piece of the underlying financing), and TWI's eventual reacquisition of fee title when the synthetic lease terminates is not a new taxable conveyance -- it's, in substance, a satisfaction of a mortgage.
Mortgage recording tax: partially taxable. The mortgage recording tax analysis turned on whether each recorded instrument secures genuinely NEW indebtedness. Citing Beth Israel Medical Center, TSB-A-98(69)S,(3)R, and Matter of Atlantic Cement Co. v. Murphy, 30 A.D.2d 456 (1968), aff'd 28 N.Y.2d 502 (1971) (an instrument that looks like a deed can be a mortgage if the parties' intent -- clear here from the documents -- was security, not sale), the Department held the SSBTT Deed's recording IS treated as recording a mortgage. But because TWI's roughly $120 million Synthetic Lease advance for its Allocable Share of the land had never previously been secured by any recorded, taxed mortgage (it was originally secured only by a security interest in TWI's LLC membership interest, not a mortgage on real property), the SSBTT Deed newly brings that $120 million into the mortgage tax base -- so recording it DOES trigger mortgage recording tax, on that amount. By contrast, the Department found the remaining chain of instruments used to restructure the broader project financing -- consolidating the separate Acquisition/Construction mortgages into one, then severing out the TWI Unit's Allocable Share, assigning that severed piece to the Synthetic Lease's Administrative Agent, amending and restating it, and recording a Memorandum of Lease and an Assignment of Lease as additional security -- are all supplemental to mortgages already recorded and taxed, and don't secure any new or further indebtedness beyond what's already been taxed, so none of them trigger additional mortgage recording tax (citing Matter of Bay View Towers Apts. v. State Tax Comm., Matter of Fifth Avenue Corp. v. Bragalini, Matter of City of New York v. Procaccino, and 200 E. 64th St. Corp. v. Manley for the general rule against double-taxing restructured or reassigned mortgage debt).
What this means for you
Off-balance-sheet "synthetic lease" financing is treated, for state transfer tax purposes, exactly like any other deed-as-security arrangement
If your synthetic lease documents consistently describe the transaction as a financing (for tax, bankruptcy, and GAAP-adjacent purposes) with beneficial ownership retained by the "lessee," expect the Department to respect that characterization and exempt both the deed to the lender-titleholder and its eventual reconveyance from RETT -- but be prepared for the recording of that deed to be scrutinized separately under the mortgage recording tax, where the analysis is about whether NEW debt is being secured, not about beneficial ownership.
A multi-member LLC used purely as a construction vehicle can distribute condo units to its true beneficial owners tax-free, even where one "member's" interest is itself layered inside a financing structure
The mere-change-of-form exemption doesn't require a simple structure -- here it applied even though the ultimate beneficial owner (TWI) held its unit through a chain that included both an LLC membership interest AND a synthetic lease trustee, as long as the underlying documents consistently identify the same real beneficial owner throughout.
Restructuring a mortgage (consolidating, severing, assigning, or amending it) generally doesn't trigger fresh mortgage recording tax -- but introducing genuinely new, previously-unsecured debt into the mix does
If you're unwinding a blanket construction mortgage into unit-specific mortgages as part of a condo conversion, the individual severed pieces and their supplements are typically tax-free if no new money is added -- but watch for situations (like here) where a piece of financing that was NEVER previously secured by a recorded mortgage (e.g., debt secured only by a membership interest, not real property) gets folded into a newly recorded deed/mortgage -- that piece is newly taxable.
Document your parties' consistent tax and bankruptcy intent when structuring deed-as-security arrangements
The Department and courts both look to the parties' documented intent (not just the form of the instrument) to distinguish a real conveyance from a security deed -- explicit, consistent language across the lease, participation agreement, and operating agreement that the arrangement is a financing, with beneficial ownership preserved in the "borrower," was central to this taxpayer-favorable RETT outcome.
Common questions
Q: If a bank trustee takes legal title to my property as part of an off-balance-sheet synthetic lease financing, does that trigger transfer tax?
A: No, if the documents consistently show the trustee holds title purely as security and beneficial ownership stays with you -- both the deed to the trustee and its eventual reconveyance to you are exempt as financing transactions.
Q: Does recording that trustee's deed also avoid mortgage recording tax?
A: Not necessarily -- the deed is independently analyzed as a mortgage, and mortgage recording tax applies to the extent it secures indebtedness that wasn't already secured by a previously-taxed recorded mortgage.
Q: If several members jointly develop a condominium project through one LLC, is distributing the finished units to each member's true beneficial owner taxable?
A: It can be exempt as a mere change of form, even in a complex financing structure, as long as the LLC's operating agreement consistently designated that member as the sole beneficial owner of its unit from the project's inception.
Q: Do all the paperwork steps involved in restructuring a big construction loan into separate unit-level mortgages trigger separate mortgage recording taxes each time?
A: Generally no -- consolidating, severing, assigning, and amending a mortgage that's already been fully taxed doesn't create new tax liability, as long as no genuinely new or additional indebtedness is introduced along the way.
Citations and references
Statutes, guidance, and case law:
- Section 1402 of the Tax Law
- Section 1401(e) of the Tax Law
- Section 1401(f) of the Tax Law
- Section 1405(b)(2) of the Tax Law
- Section 1405(b)(6) of the Tax Law
- Section 575.11 of the Real Estate Transfer Tax Regulations
- Section 253 of the Tax Law
- Section 253-a of the Tax Law
- Section 250.2 of the Tax Law
- Section 255.1(a) of the Tax Law
- Section 641.6(b) of the Mortgage Recording Tax Regulations
- Section 645.1(a) of the Mortgage Recording Tax Regulations
- Section 645.2 of the Mortgage Recording Tax Regulations
- Beth Israel Medical Center, Adv Op Comm T&F, October 7, 1998, TSB-A-98(69)S,(3)R
- Matter of Atlantic Cement Co. v. Murphy, 30 A.D.2d 456 (1968), aff'd 28 N.Y.2d 502 (1971)
- Matter of Bay View Towers Apts. v. State Tax Comm., 48 A.D.2d 86, aff'd 40 N.Y.2d 856
- Matter of Fifth Avenue Corporation v. Bragalini, 4 A.D.2d 387
- Matter of City of New York v. Procaccino, 46 A.D.2d 594
- 200 E. 64th St. Corp. v. Manley, 44 A.D.2d 11
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_2001.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a01_7r.pdf
Original ruling text
New York State Department of Taxation and Finance
Office of Tax Policy Analysis
Technical Services Division
TSB-A-01(7)R
Real Estate Transfer Tax
July 26, 2001
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. M010110B
On January 4, 2001, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Time Warner Inc., 75 Rockefeller Plaza, New York, New York 10019 (herein referred
to as “Petitioner” or, from time to time, “TWI”). Further information was received from Petitioner
on January 11, 2001, disclosing the merger of Petitioner with America OnLine. As of January 11,
2001, Petitioner and America OnLine became wholly-owned subsidiaries of a new parent company
known as AOL Time Warner. Additional information related to the Petition was received on
January 19 and February 12, 2001.
The issues raised by Petitioner, based on the facts described in this petition are:
(1) Whether the conveyance of fee title to the TWI Unit by Columbus Centre LLC (“LLC”)
to State Street Bank and Trust Company, as Trustee (“SSBTT”) (the “SSBTT Deed”) shall
be treated as the transfer of title to the TWI Unit by LLC to Petitioner, followed by the grant
of a mortgage encumbering the TWI Unit by Petitioner, as mortgagor, to SSBTT, as
mortgagee.
(2) Whether the SSBTT Deed is exempt from the real estate transfer tax as a change in form
of ownership with no change in beneficial ownership.
(3) Whether the “Lease” of the TWI Unit by SSBTT to Petitioner pursuant to the Synthetic
Lease financing shall be considered a financing arrangement, and not subject to the real
estate transfer tax.
(4) Whether the conveyance of fee title to the TWI Unit to Petitioner upon termination of
the Synthetic Lease is subject to the real estate transfer tax.
(5) Whether the recordation of the SSBTT Deed shall be considered the recordation of a
mortgage encumbering the TWI Unit for the purposes of the mortgage recording tax.
(6) Whether all of the instruments that are included within the definition of "mortgages" for
the purposes of mortgage recording tax and that are recorded in connection with the
Synthetic Lease transaction, specifically the consolidation of the A/C mortgages, the
severance of the A/C mortgages, the Assignment of the Participants’ Mortgage, the A/R
Participants’ Mortgage, the SSBTT Deed, the Memorandum of Lease, and the Assignment
of Lease, will be considered as securing the same principal indebtedness. Provided that
mortgage recording tax has been paid with respect to the full amount of the indebtedness
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secured by a mortgage on real property, whether the recordation of the additional instruments
referred to above in respect of such indebtedness are exempt from mortgage recording tax
pursuant to Tax Law § 255.
Petitioner presented the following facts as the basis for this advisory opinion.
Petitioner expects to locate its world headquarters in a condominium unit (the "TWI Unit")
being constructed on property (the "Land") adjacent to Columbus Circle in New York City. The
financing for the acquisition of the TWI Unit's "Allocable Share" of the Land, and the intended
permanent financing for the TWI Unit, are in the form of a synthetic lease arrangement, described
below (the "Synthetic Lease"). In addition, for the reasons set forth below, Columbus Centre LLC,
a limited liability company ("LLC") will hold title to the entire condominium project (the "Project"),
including the TWI Unit, until the "core and shell" of the building are complete and the Project is
submitted to a condominium regime.
1.
The Synthetic Lease
The Synthetic Lease is a financing structure that confers tax ownership of the TWI Unit on
Petitioner, but is treated for financial statement purposes as an "operating lease." This financial
statement classification is desirable and important to Petitioner, because it does not require Petitioner
to report the amounts owed under the Synthetic Lease as a balance sheet liability; for that reason
Synthetic Leases are sometimes referred to as "off-balance-sheet-financing."
The Synthetic Lease essentially involves four persons or groups of persons: Petitioner, a
Trust, Lenders, and Certificate Holders. The Trust was established between State Street Bank and
Trust Company, as Certificate Trustee, and the Certificate Holders, and is governed by an Amended
and Restated TWC Trust Agreement dated as of July 31, 2000. State Street Bank and Trust
Company, not in its individual capacity but as Certificate Trustee, acts on behalf of the Trust. The
Trust and State Street Bank and Trust Company, acting in such trustee capacity, are collectively
referred to herein as "SSBTT." SSBTT is a single-purpose entity formed solely to function under
the synthetic lease.
The "Lenders" lend money to SSBTT under secured "Loans." The "Certificate Holders"
make equity investments in SSBTT, which investments (the "Equity Investments") are evidenced
by "Certificates." The Loans and the Equity Investments are governed by an "Amended and Restated
Participation Agreement" dated as of July 31, 2000, to which Petitioner also is a party. (The
Participation Agreement is sometimes referred to herein as the "P.A.") The Certificate Holders and
Lenders are at times collectively referred to as the "Participants," and the funds they provide are at
times collectively referred to as the "Advances or TWC Advances." Neither SSBTT nor any of the
Participants is related to or affiliated with Petitioner.
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July 26, 2001
Some of the Advances were used in July, 2000 to fund the TWI Unit's "Allocable Share" of
the acquisition costs of the Land. Further Advances will be used to refinance the TWI Unit's
"Allocable Share of the Acquisition/Construction Financing" as described below, and possibly to
fund the acquisition and construction of improvements and equipment Petitioner will use in
connection with the TWI Unit (the "Build-Out").
As more fully described below, during the initial construction of the Project LLC will hold
title to the Project. Once the requisite level of completion is attained, a declaration of condominium
will be filed, and LLC will convey fee title to the TWI Unit. To effect the Synthetic Lease financing,
SSBTT is nominally a Member of LLC, and holds title to Petitioner’s membership interest in LLC
(the "TWC Membership Interest"); and SSBTT will acquire legal title to the TWI Unit when such
Unit is conveyed by LLC. The conveyance of fee title to the TWI Unit by LLC to SSBTT is
sometimes referred to herein as the "SSBTT Deed."
While SSBTT is the nominal member of LLC, SSBTT and Petitioner have entered into a
"Construction Agency Agreement" under which SSBTT has made Petitioner its exclusive agent for
purposes of the construction, design and conveyance of the TWI Unit. Under the Construction
Agency Agreement, described more fully below, Petitioner effectively controls all aspects of the
TWC Membership Interest in LLC.
Upon the conveyance of legal title to the TWI Unit by the SSBTT Deed, SSBTT will acquire
fee title to the TWI Unit, and will immediately lease the TWI Unit to Petitioner under the "Lease."
Petitioner will make payments under the Lease, denominated "Rent", which payments will be applied
to pay the Interest or Yield on the Advances, and to repay the Advances.
The Lease and the Participation Agreement contain a series of options and payment
obligations (collectively, the "Options"). As described below, the Options are intended to satisfy
generally accepted accounting principles ("GAAP") that govern the classification of a transaction
as an "operating lease." As a practical and economic matter, however, the effect of the Options is
to make it highly likely that Petitioner will acquire fee title to the TWI Unit, and the Advances will
be repaid, at the expiration of the Lease. At this point in time it appears highly likely that Petitioner
will exercise its Purchase Option, thereby repaying the Advances and acquiring title to the TWI Unit,
at the termination of the Synthetic Lease.
1.
Parties’ Intent
The Lease provides that "for purposes of all Taxes and for purposes of bankruptcy and
receivership law . . . the Transactions [i.e., all elements of the Synthetic Lease] constitute a financing
by the Participants to [TWI] and preserves beneficial ownership in the TWI Unit in TWI."
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Real Estate Transfer Tax
July 26, 2001
The Participation Agreement recites that the purpose of the Synthetic Lease is "providing
financing for . . . the acquisition of the TWI Unit and the Construction of the TWI Unit Tenant
Improvements." The Participation Agreement also provides that "for purposes of all Taxes, and for
purposes of bankruptcy and receivership law (including any substantive law upon which bankruptcy
and receivership proceedings are based):
(i)
the Transactions . . . constitute a financing by the Participants to
[TWI] and preserve beneficial ownership in the Leased Property in
[TWI];
(ii)
[the Lease] grants a security interest or Lien . . . in the [TWI Unit] .
. . in favor of [SSBTT] and for the benefit of the Participants, to
secure [TWI’s] payment and performance of the Obligations . . . ."
The Participation Agreement also states that "the parties . . . intend and agree that in the event
of [insolvency, receivership or bankruptcy], the transactions evidenced by the Operative Documents
(including, without limitation, the Lease) constitute a financing made directly to [TWI] by the
Participants, and that [SSBTT] holds title to [the TWI Unit] for the benefit of the Participants to
secure Obligors' obligations to repay such financing to the Participants . . . ."
In the Amended and Restated Operating Agreement of the LLC, executed by SSBTT and the
other Members on July 31, 2000 (the "LLC Operating Agreement" or the "O.A."), the other Members
of the LLC "acknowledge and agree that [SSBTT] is becoming a Member in the Company solely as
an accommodation to TWI. . . and [SSBTT], the Administrative Agent, the Certificate Trustees and
the Participants are participating in the Transactions solely to facilitate a lease financing transaction
for the benefit of TWI and its Affiliates, and not in any other capacity . . . ."
2.
Consistent Tax Treatment
For income tax purposes the parties will consistently treat the Synthetic Lease as a financing.
During construction Petitioner will capitalize interest and other construction-period costs as required
under Internal Revenue Code §263A, as the owner of the Unit under construction. Petitioner, not
SSBTT, will claim the depreciation deductions with respect to the TWI Unit. Petitioner will treat
its payments under the Lease as payments of debt service, rather than rent. Neither SSBTT nor
Petitioner will treat the conveyance of fee title to the TWI Unit by SSBTT to Petitioner at the
termination of the Lease as a taxable transfer.
The Participation Agreement obligates the parties to "report the transaction consistently with
the tax treatment,” set forth in the previous paragraph, i.e., as a financing.
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July 26, 2001
3.
Control and Responsibility - TWC Membership Interest
The Participation Agreement provides that, prior to advancing funds to pay the TWI Unit's
Allocable Share of the Land acquisition costs, SSBTT, "which is intended to take title to the TWI
Unit," will become a Member of the LLC.
While SSBTT is the nominal Member of LLC, Petitioner will exercise all of the rights, and
be obligated to perform all obligations, relating to the TWC Membership Interest. Under the
Amended and Restated TWI Construction Agency Agreement ("Construction Agency Agreement"
or "C.A.A.") dated as of July 31, 2000 between SSBTT and Petitioner, Petitioner will:
•
control the acquisition, design and construction of the TWI Unit;
•
request funds from SSBTT to pay costs associated with the TWI Unit;
•
negotiate and monitor all agreements relating to the TWI Unit;
•
perform or cause the performance of all design and supervisory functions;
•
perform or cause the performance of any other act necessary or desirable to cause the
completion of the TWI Unit;
•
exercise all rights and benefits, and perform all duties, liabilities and obligations of
SSBTT under the LLC Operating Agreement and other agreements relating to the
acquisition and development of the TWI Unit.
The only limitation on the exercise of the foregoing authority by Petitioner on behalf of the SSBTT
is that Petitioner cannot enter into any agreement that would impose any personal liability on
SSBTT.
The LLC Operating Agreement specifies that Petitioner will act on behalf of SSBTT, "and
that TWI has the authority to vote [SSBTT's] Membership Interest in the Company and to exercise
all other rights and privileges of, and on behalf of, the TWC Member hereunder . . . ."
The LLC Operating Agreement also specifies that SSBTT shall have no liabilities or
obligations under Articles IX or X thereof as a Member of the LLC, except to the extent SSBTT is
indemnified against such liability by Petitioner under the "Back-Up Indemnity."
The Back-Up Indemnity given by Petitioner to SSBTT recites that "[SSBTT] has assigned
and delegated to TWI, as construction agent for TWC Member under the Operative Documents, any
and all rights and obligations of [SSBTT] to participate, monitor, vote, assist, review, inspect,
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supervise, pass judgment upon, inform any other person or take any role in the management,
operation, ownership or decision-making of the Company in any manner whatsoever (such rights
and/or obligations, collectively, the 'Rights and Obligations'), such that the Rights and Obligations
will be exercised and/or performed (or fail to be performed), if at all, only by TWI and never directly
by [SSBTT]." The Back-Up Indemnity obligates Petitioner to pay and assume liability for all claims,
etc. that may be asserted against SSBTT under the LLC Operating Agreement based on Petitioner’s
failure to exercise or perform the "Rights and Obligations."
4.
Control and Responsibility - TWI Unit
As set forth above, Petitioner is responsible for overseeing the design and construction of the
TWI Unit.
The Lease commences on the date title to the TWI Unit is conveyed by LLC to SSBTT. In
the Lease, SSBTT authorizes Petitioner to accept delivery of the TWI Unit on SSBTT's behalf, and
Petitioner agrees that the conveyance of title to SSBTT "shall, without further act, constitute the
irrevocable acceptance by Lessee of the TWI Unit for all purposes of this Lease and the other
Operative Documents on the terms set forth therein and herein."
The Lease is a "triple net lease," under which Petitioner has responsibility for, and holds
SSBTT harmless from, all costs associated with possession and ownership of the TWI Unit including
(but not limited to) property taxes, utility charges, repairs and insurance. The obligation of Petitioner
to pay rent is absolute and unconditional, without regard to the condition of the TWI Unit, and the
rent is to be paid to SSBTT "absolutely net."
During the term of the Lease, the TWI Unit will be in the possession of Petitioner, not
SSBTT.
Petitioner is obligated to maintain the TWI Unit in good condition and operating order and
in compliance with applicable law.
Petitioner is entitled under the Lease to make any alterations, renovations, improvements and
additions to the TWI Unit, provided only that such "modifications not impair the value or economic
useful life of the TWI Unit."
Petitioner is entitled to sublease all or any part of the TWI Unit without SSBTT's consent.
An assignment or other transfer of Petitioner’s leasehold interest under the Lease does require
SSBTT's consent, which is consistent with standard "due on sale" clauses in mortgages.
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Real Estate Transfer Tax
July 26, 2001
5.
Lender’s Credit
Under the Participation Agreement, TWC Advances made by the Lenders and Certificate
Holders are to be applied to pay TWI Unit costs.
The TWC Advances are tied to funding requests made by Petitioner, and the Advances are
made directly to the "Administrative Agent" for payment to the person designated by Petitioner as
entitled to payments.
The obligation of the Participants to refinance the TWI Unit's Allocable Share of the
Acquisition/Construction Financing is conditioned upon, among other things, Petitioner delivering
an appraisal of the TWI Unit which establishes that the value of the TWI Unit, both when conveyed
to SSBTT and when completed, will not be less than the "Minimum Coverage Amount." This
requirement is designed to ensure that the TWI Unit has sufficient value to support the Participants'
extension of nonrecourse financing with respect to such Unit.
The Participation Agreement specifies that the Lease grants a security interest in the TWI
Unit for the benefit of the Participants, to secure Petitioner’s performance, and further specifies that
the Mortgage on the TWI Unit, to be given by SSBTT, as mortgagor, secures Petitioner’s payment
and performance of its "Obligations" under the Synthetic Lease. The mortgagee under the Mortgage
will be Banc of America, or an affiliate thereof, as Administrative Agent for the benefit of the
Participants.
The Lease has a five-year term. Thereafter Petitioner can renew the lease but only if the
Participants have extended the Maturity Date of the Advances under the Participation Agreement,
and an appraisal of the TWI Unit shows there remains sufficient "Coverage."
To induce the Participants to make the Advances, Petitioner provided Participants with a
"Guarantee" of the obligations of Petitioner and its affiliates under the Synthetic Lease.
Petitioner makes representations and warranties and provides covenants in the Synthetic
Lease that are customary in financings. For example, the Participation Agreement obligates
Petitioner (rather than SSBTT) to provide periodic financial information and notification of any
"Material Event." The Participation Agreement specifically incorporates for the benefit of the
Participants various agreements, covenants and obligations of Petitioner set forth in a 1997 "Credit
Agreement" between Petitioner and the Chase Manhattan Bank. Petitioner also provides the
Participants with indemnities as to any general or tax liabilities arising out of the TWI Unit.
Under the TWC lease any Petitioner Event of Default may trigger a default under, and
requires repayment of, the Advances. A Petitioner Event of Default is defined in terms of
Petitioner’s own financial circumstances.
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SSBTT is acting in the Synthetic Lease solely in its capacity as a Trustee under the Trust
Agreement, not in its individual capacity. The Trust is a single-purpose entity with no assets other
than its interests in the Synthetic Lease. Repayment of the Loans to the Lenders and the Equity
Investments to the Certificate Holders, as well as payment of the Interest and Yield thereon, will be
made by SSBTT from the rents paid by Petitioner under the Lease, and from the proceeds payable
to SSBTT under the Options, or from the assets of the Trust, and otherwise will be without recourse
to SSBTT.
The "rent" payable by Petitioner under the Lease is defined by reference to, and is equal to,
the Interest and Yield payable to the Participants on their Advances plus any additional amounts
owed under the Synthetic Lease, including any required repayment of the outstanding Loan balance
and Certificate amounts. The Participation Agreement specifies that: "Anything else . . . to the
contrary notwithstanding it is the intention of [the parties] that the amount and timing of installments
of Basic Rent due and payable from time to time from [TWI] under [the Lease] shall be equal to the
aggregate payments due as Interest and principal on the Loans and Yield on the Certificate Amounts.
. . . ."
- Risk of Loss
Under the Lease Petitioner assumes all risk of loss to the TWI Unit and is obligated to
maintain insurance covering any loss or liability to SSBTT.
The Lessor does not make any warranty or representation as to the status or condition of the
TWI Unit, with all risk being on Petitioner.
If a casualty occurs to the TWI Unit after it has been conveyed to SSBTT, Petitioner will be
obligated to restore the TWI Unit to its original condition, and all amounts of insurance or
condemnation proceeds shall be paid to Petitioner, unless a Lease Event of Default shall have
occurred. If a Lease Event of Default shall have occurred, such insurance or awards may be applied
to payment of the Loans and the Equity Investments, in that order, with any excess being paid to
Petitioner.
If a condemnation occurs, Petitioner will (in the absence of an Event of Default) control the
negotiations with the relevant governmental authority. Without regard to the sufficiency of the
compensation received, Petitioner is obligated to restore the TWI Unit to substantially the same
condition and value as existed prior to the condemnation.
If a "Significant Casualty," a "Significant Condemnation," or a "Significant Event" (i.e., an
"Environmental Violation"), should occur, both SSBTT and Petitioner have the right to elect to
terminate the Lease. Upon such termination Petitioner is obligated to purchase the TWI Unit by
paying SSBTT the "Purchase Amount." The "Purchase Amount" is defined as an amount equal to
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the outstanding balances of the Advances relating to the TWI Unit (the "TWC Lease Balance"), plus
any accrued but unpaid Rent relating to the TWI Unit. The "Purchase Amount" is thus equivalent
to the amount of Petitioner’s indebtedness to the Participants, including any unpaid interest; and the
"TWC Lease Balance" is equivalent to the unpaid principal amount of the Advances.
- Benefit of Appreciation
Petitioner has an option under the Construction Agency Agreement to purchase the interest
of SSBTT in the LLC and the TWI Unit for the Purchase Amount.
Under the Lease, Petitioner has an option (the "Purchase Option") to acquire title to the TWI
Unit from the Lessor at any time by paying an amount equal to the Purchase Amount.
As noted above, Petitioner also has the right to sublease all or any part of the TWI Unit
without SSBTT's consent, and without having to share any revenues or profits from such
transactions.
Both during the term of the Synthetic Lease and upon its termination, therefore, the position
of SSBTT and the Participants is identical to a lender. All appreciation and value in excess of the
Advances inures to Petitioner. - Ultimate Ownership
The Synthetic Lease documentation clearly states that the transaction constitute a financing,
and that beneficial ownership be preserved in Petitioner. At this point in time it appears highly likely
Petitioner will exercise its Purchase Option and acquire title to the TWI Unit at the termination of
the Synthetic Lease. SSBTT does not intend to own the TWI Unit after the Synthetic Lease expires,
and the documents contain a variety of Options under which SSBTT will not end up owning the TWI
Unit.
As noted above, the lease grants Petitioner a Purchase Option under which Petitioner can
purchase the TWI Unit at any time during the Lease for the Purchase Amount. As an economic
matter, Petitioner would be expected to exercise this option if the value of the TWI Unit exceeds the
Purchase Amount required to be paid under the Purchase Option.
In lieu of exercising the Purchase Option, Petitioner has the right to exercise a "Sale Option."
The Sale Option essentially provides a mechanism under which Petitioner can limit its recourse
liability to 89.75% of the total Advances, rather than being obligated to repay the debt in full. This
limitation is necessary to comply with the GAAP operating lease rules. However, if Petitioner
exercises the Sale Option, it will be obligated to pay up to 89.75% of the total indebtedness, and will
lose all of its interest in the TWI Unit.
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The specific mechanics of the Sale Option prescribe that Petitioner must market the TWI
Unit for sale to the highest bidder upon the expiration of the Basic Term of the Lease. Petitioner also
will be obligated to pay a "top-up" amount equal to the excess of the "Sales Recourse Amount" over
the net proceeds of the third-party sale.
The "Sales Recourse Amount" is equal to the amount that, if paid on the date of
determination of the Sales Recourse Amount, would have a discounted value, as of the
commencement of the base term of the Lease, together with fees, basic rent and a fixed expense
amount, equal to 89.75% of the outstanding Advances as of such date of determination. If Petitioner
exercises the Sale Option it must first pay the full Sales Recourse Amount (i.e., 89.75%) to SSBTT.
SSBTT will then add to that amount the net proceeds of a sale of the Unit, and, following the sale
and payment of all expenses, will remit to Petitioner any excess of those total net funds over the
Purchase Amount.
Thus, in a case where the proceeds of the sale plus the Sales Recourse Amount exceed the
Purchase Amount, Petitioner receives the excess. To the extent the net proceeds of sale are less than
the Purchase Amount, however, Petitioner bears the cost of such deficiency, up to a maximum
recourse amount of 89.75% of the Advances. The effect of the 89.75% limitation is that the synthetic
lease financing includes a relatively small (10.25%) nonrecourse component.
If the Sale Option is improperly exercised or the conditions thereto are not fulfilled, SSBTT
can compel Petitioner to purchase the TWI Unit for the full Purchase Amount.
If the Sale Option is exercised but the TWI Unit is not sold by the "Expiration Date," then,
in addition to paying the Sales Recourse Amount, Petitioner is obligated, until the full TWC Lease
Balance is paid or SSBTT elects to terminate the Lease, (thereby terminating Petitioner’s right to
occupy the TWI Unit) to continue to market the TWI Unit until it is sold, and to continue to pay the
Rent.
In addition to Petitioner’s Purchase Option and Sale Option, in certain circumstances, the
Certificate Holders have the option (the "Put Election Option") to require SSBTT to redeem their
Equity Investments. The Put Election Option applies in the event that, prior to SSBTT's acquisition
of title to the TWI Unit, there is a default or some other failure to satisfy the conditions for
conveyance of the TWI Unit. In such event, the Certificate Holders may require that SSBTT redeem
their interests at face.
To provide for SSBTT's potential obligation to redeem the Certificate Holders should the Put
Election Option be exercised, at the time that SSBTT became a Member of the LLC, and from time
to time thereafter if needed to cover increased costs, Petitioner made and will make loans to SSBTT
(the "Liquidity Loan") in an amount sufficient to provide SSBTT with adequate liquidity to repay
the Certificate Holders' Equity Investment. The Liquidity Loan will be evidenced by a promissory
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note. The proceeds of this loan will be segregated by SSBTT in an investment account (the
"Investment Account") at a specified bank, and invested by SSBTT in specified permitted
investments. In the event the Certificate Holders exercise the Put Election Option, SSBTT may use
the amounts on deposit in the Investment Account to fund its redemption of the Equity Investments.
Petitioner will then be obligated to pay rent under the TWI Lease in an amount sufficient to enable
SSBTT to repay the outstanding balance of the Loans made by the Lenders to SSBTT.
The Certificate Holders' Put Election Option, and the related TWI Liquidity Loan effectively
provide a mechanism for terminating the Synthetic Lease if the conditions precedent to the
permanent financing of the TWI Unit, as imposed by the Participants under the Participation
Agreement, are not timely fulfilled. If the Put Election Option were to be exercised, SSBTT would
be consolidated with Petitioner for GAAP purposes, and there would no longer be any Synthetic
Lease financing. Petitioner would then become obligated to assume the obligations of SSBTT under
the LLC Operating Agreement. Petitioner would be obligated to acquire title to the TWI Unit,
subject to its Allocable Share of the Acquisition/Construction Financing, and would be responsible
for securing permanent financing to refinance such Allocable Share. Thereafter, Petitioner would
own both title to and the beneficial interest in the TWI Unit.
If there is a default under the Construction Agency Agreement SSBTT may terminate the
Construction Agency Agreement and demand that Petitioner pay the outstanding amount of the TWC
Advances. Upon Petitioner making such payment, SSBTT will transfer to Petitioner all of its interest
in the LLC and TWI Unit, and the Synthetic Lease will terminate.
The liability of Petitioner to SSBTT under the Construction Agency Agreement in the event
of a default is in certain cases limited to 89.9% of the costs of the Project allocable to the TWI Unit.
This limitation again is imposed to comply with GAAP requirements. However, notwithstanding
this limitation, should such a default occur, the Certificate Holders may exercise their Put Election
Option. Moreover, prior to the conveyance of the TWI Unit, the Advances will be used to fund only
the TWI Unit's Allocable Share of the Land acquisition costs, plus certain soft costs, but the 89.9%
limitation is measured by reference to the entire costs of the TWI Unit, including costs funded by
the Construction Loan. As a result, the limitation is unlikely to represent any meaningful limitation
on Petitioner’s liability to SSBTT.
The Lease Events of Default include non-payment of Rent (i.e., principal and interest), breach
of warranty or covenant, an Agency Event of Default and customary insolvency events with respect
to Petitioner. Upon the occurrence of a Lease Event of Default, SSBTT may exercise a variety of
remedies. Petitioner retains the right to exercise its Purchase Option described above, however,
meaning that Petitioner can cure a default by repaying the Synthetic Lease financing.
If there is a Lease Event of Default, SSBTT can require Petitioner to purchase the TWI Unit
by paying the Purchase Amount. Under this provision, following completion of construction and
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delivery of the SSBTT Deed, the Synthetic Lease financing is effectively fully recourse to Petitioner
should Petitioner default.
Alternatively, SSBTT could remarket the TWI Unit; to the extent that SSBTT remarkets the
TWI Unit in lieu of Petitioner purchasing it, SSBTT may obligate Petitioner to pay not just the top
off amount, but the full excess of the outstanding TWC Lease Balance over the net proceeds of sale
realized from such remarketing.
The Synthetic Lease transaction is not intended to result in the ownership of the TWI Unit
by SSBTT following the termination of the Lease. Whether through exercise of Petitioner’s
Purchase Option or Sale Option, or the Certificate Holder's exercise of their Put Election Option, or
SSBTT's rights in the event of a default, the parties expect that the Participants will be repaid their
Advances, and SSBTT will convey the TWI Unit to Petitioner.
On the facts of this particular transaction, moreover, a scenario other than Petitioner’s
exercise of its Purchase Option is as a practical matter unlikely. The TWI Unit is being built with
the expectation it will constitute Petitioner’s world headquarters. As specified in the LLC Operating
Agreement, the Members intend that Petitioner will occupy the TWI Unit as its world headquarters,
and that the entire Project will be named for Petitioner. The TWI Unit is designed to incorporate
column-free broadcast studios and other unique features that are important to Petitioner’s business.
The TWI Unit will contain approximately 800,000 square feet, a block of high-quality space that is
extremely rare in New York City. The Unit, and indeed the entire Project, are designed to provide
Petitioner with a distinct "branded" presence in a Manhattan hub location, and to project worldwide
a distinct corporate image.
As set forth in the parties' "Summary" of the Synthetic Lease, "[t]he TWI Unit will be the site
of TWI’s world headquarters, a high profile project to which TWI is committed at the highest
corporate levels, and in which TWI will have invested significant time and resources."
It is not anticipated that, only a few years into its use of this unique corporate space,
Petitioner would abandon the TWI Unit. The costs of securing and reconfiguring new space
elsewhere, the logistics of relocating the people who will work in the TWI Unit, and the perception
issues associated with abandoning a very new and highly touted world headquarters facility, all
weigh in favor of Petitioner acquiring title to the TWI Unit by exercising the Purchase Option at the
end of the Lease term.
B.
The LLC
The Members of LLC (each a "Member" and collectively the "Members") are the "TWC
Member," the "Hotel Member," the "Residential Member," the "Office Member," the "Retail
Member" and the "Garage Member." The Members other than the TWC Member are referred to
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herein as the "Other Members." In the case of the TWC Membership Interest, by virtue of the
Synthetic Lease Financing described above, the terms "Member" and "TWC Member" encompass
both SSBTT and Petitioner; SSBTT holds legal title to the TWC Membership Interest and will
acquire legal title to the TWI Unit; Petitioner is the beneficial owner of the TWC Membership
Interest and of the TWI Unit. The TWC Membership Interest and the TWI Unit will be beneficially
owned by Petitioner.
The Members are developing the multi-use real estate condominium project (“Project”) on
property (the "Land") adjacent to Columbus Circle in New York City. When constructed it is
currently intended that the Project will comprise seven condominium units, as follows:
1.
The TWI Unit;
2.
The Hotel Unit;
3.
The Residential Unit;
4.
The Office Unit;
5.
The Retail Unit;
6.
The Garage Unit; and
7.
The J@LC Unit. (The LLC Operating Agreement uses the term "JLC Unit" in place
of the J@LC Unit referred to herein.)
Appurtenant to each condominium unit is an interest in the condominium's common
elements. The common elements, which are defined in the LLC Operating Agreement as including
General Common Elements, Limited Common Elements, and Shared Limited Common Elements,
will consist of the Land and the common facilities identified in the declaration of condominium to
be finalized at or prior to substantial completion of the improvements (the "Condominium
Declaration") for the Project. Each of the seven units in the condominium, together with its
appurtenant common elements interest, is referred to as a "Unit," and collectively these constitute
the "Units." Units 1-6 are referred to individually as a "Member's Unit," and collectively as the
"Members' Units."
The Members' Units will vary in both form and function. Each of Units 2-6 will be used
primarily for the purposes described in its name. The JLC Unit will consist of an auditorium and
related facilities and will be used by Jazz at Lincoln Center Inc. ("J@LC"), a not-for-profit
organization affiliated with Lincoln Center. As described above, the TWI Unit will include
corporate offices and broadcast studio space for Petitioner and its affiliates.
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During the development of the Project, title to the Land and the building under construction
will be held by LLC. However, from the inception of the Project, the LLC Operating Agreement
clearly provides that each Member is considered to be the beneficial owner (the "Owner") of such
Member's Unit. In the case of the TWI Unit, the LLC Operating Agreement specifies that the TWC
Member is the beneficial owner of the TWI Unit, and the Synthetic Lease provides that Petitioner,
rather than SSBTT, is the beneficial owner of the TWC Membership Interest and the TWI Unit.
The design, use, and functions of the various Units in the Project are all quite different.
Petitioner would have preferred that SSBTT hold title to the TWI Unit outright from the beginning,
without interposing the LLC structure. However, for the reasons set forth below, it was determined
that the LLC should hold title to the Project, and should develop the Project as a single project, until
the "core and shell" of the building are completed, the Land and improvements thereon are submitted
to a condominium regime, and title to the Units is transferred to SSBTT and the Other Members as
required in the LLC Operating Agreement.
There are four reasons for using the LLC structure to hold title to the Units during
construction. First, this facilitates the contractual arrangements with the construction manager and
various trade contractors performing the physical work on the Project, which is a single, physically
integrated structure. Second, it makes it possible to obtain single surety bonds for each of the major
trades that will be performing work on the Project. Third, it makes it possible to obtain a
construction loan and mortgage on the entire project; separate mortgages on each of the Units, while
they are under construction, are not practically obtainable. (The "Acquisition/Construction
Financing" for the Project is discussed below.) Finally, historically it has not been possible to file
a Declaration of Condominium and convey title to individual condominium units prior to the
substantial completion of construction. The LLC structure therefore was chosen as the only practical
alternative for holding legal title to the Units during the construction process. It is nonetheless the
explicit intent that each Member be the beneficial owner of such Member's Unit from inception, and
in the case of the TWI Unit it is explicitly intended that Petitioner be the beneficial owner of the
Unit.
The LLC Operating Agreement makes clear that, as among the LLC and its Members, each
Member is the sole beneficial owner of such Member's Unit. The LLC Operating Agreement recites
the parties' agreement that each Member is the sole beneficial owner of such Member's Unit, and
explains that the LLC is being used to hold title to the Project during construction, to facilitate the
Members' construction of their Units.
The Members of LLC do not have co-ownership interests in the Project as a whole. Instead,
the LLC Operating Agreement specifies that each Member's Unit is beneficially owned by its
respective Owner (e.g., the Retail Unit is beneficially owned by the Retail Member). The LLC
Operating Agreement further provides that each Member shall receive and be entitled to all benefits,
and shall bear and be subject to all obligations, attributable to the Unit beneficially owned by such
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Member. The LLC Operating Agreement also states that no Member shall have any beneficial
interest in any other Member's Unit.
For federal, state and local tax purposes, the LLC Operating Agreement treats each Unit as
if it is owned by its Owner, and not as an asset owned by LLC. The Agreement allocates to each
Member 100% of every item of income, gain, loss, deduction and credit attributable to such
Member's Unit. The Members do not share in the profits or losses of other Members' Units. The
LLC Operating Agreement further provides that each Member has the sole authority to make (or
direct the LLC to make) tax elections affecting such Member's Unit. Books of account are to be
maintained to separately identify the specific assets and liabilities attributable to each Member. Any
cash flow attributable to a particular Unit will be distributed only to the Owner of such Unit, and will
not be divided among the Members.
In the case of the TWI Unit, the effect of all of the foregoing provisions is to make clear that,
as among the TWC Member, the LLC, and the Other Members, it is the TWC Member that is the
true owner of the TWI Unit. Overlaying this agreement among the LLC and its Members are the
Synthetic Lease agreements, which establish that, as between Petitioner and SSBTT, Petitioner is
the beneficial owner of both the TWC Membership Interest and the TWI Unit, and SSBTT merely
holds title pursuant to a financing arrangement.
The Project will be funded by investments each Member will make out of its own funds or
separate borrowings ("Member Equity"), and an acquisition loan, a construction loan, and a
mezzanine loan under one or more note(s) and mortgage(s) entered into by the LLC encumbering
the Land and the entire Project. The acquisition loan, the construction loan and the mezzanine loan
are referred to collectively herein as the "Acquisition/Construction Financing."
The Acquisition/Construction Financing was entered into by LLC, but under the LLC
Operating Agreement and the Acquisition/Construction Financing, the TWI Member and the Hotel
Member are each allocated a separate "Allocable Share" of the entire loan, and the Residential,
Retail, Garage and Office Members (collectively, the "Affiliated Members") are allocated a single
combined Allocable Share of the entire loan, as described below.
The recorded mortgage securing the portion of the Acquisition/ Construction Financing
advanced for the acquisition of the Land was executed not only by the LLC as record owner, but also
by all of the Members as owners of their respective Units, to evidence their consent to the mortgage.
SSBTT, as the holder of legal title to the TWC Membership Interest, was the party who executed the
mortgage for the TWC Member.
While consenting to such mortgage, however, Petitioner did not borrow under the
Acquisition/Construction Financing to fund its Allocable Share of the Land acquisition cost. Instead,
Petitioner financed its approximately $120,000,000 Allocable Share of the Land cost through the
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Synthetic Lease facility. Because title to the Land is currently held by LLC, Petitioner’s
indebtedness under the Synthetic Lease for such borrowing is currently secured by a security interest
in the TWC Membership Interest in the LLC (through SSBTT's ownership of legal title to such
Interest), and is not secured by any recorded mortgage.
The other Members of the LLC borrowed approximately $133,000,000 under the
Acquisition/Construction Financing, and used other sources of funding, to finance the acquisition
of their respective shares of the Land.
The $133 million indebtedness under the
Acquisition/Construction Financing is allocated to Members other than Petitioner, and is secured by
the recorded mortgage encumbering the Land.
The Acquisition/Construction Lender will advance additional funds, as described in the
Financing Representations, to finance the construction of the Project. The construction loan portion
of the Acquisition/Construction Financing will be determined by calculating loan amounts for each
Unit separately, based upon either the value of such Member's Unit, the debt service coverage of
such Member's Unit, or the total costs attributable to such Member's Unit (including such Unit's
percentage share of the costs of the Land, the other common elements and of constructing the JLC
Unit). The Acquisition/Construction lender will consider the financial viability of each Unit
separately, and will require different percentages of Member Equity from the various Members, or
guaranties, depending upon the lender's assessment of the level of risk associated with each Unit.
It is estimated the construction loan portion of the Acquisition/Construction Financing will
aggregate $1,300,000,000, of which an estimated $465,000,000 will be allocated to the TWI Unit.
The full amount of the construction loan portion of the Acquisition/Construction Financing,
including the construction loan advances made in respect of the TWI Unit, will be secured by one
or more recorded mortgages encumbering the Project. The mortgages that secure the indebtedness
incurred under the Acquisition/Construction Financing are referred to herein as the "A/C Mortgage."
The Acquisition/Construction Financing will provide that, after the filing of the
Condominium Declaration and upon the conveyance of the TWI Unit to SSBTT and the Hotel Unit
to the Hotel Member, the A/C Mortgage will be severed into separate mortgages reflecting each such
Unit's Allocable Share of the proceeds advanced under the Acquisition/Construction Financing; and
the Owner of each such Unit will replace its Allocable Share of the Acquisition/Construction
Financing with permanent mortgage financing. In the case of the TWI Unit, the Synthetic Lease
financing will replace the TWI Unit's Allocable Share of the Acquisition/Construction Financing.
To effect the replacement of the TWI Unit's Allocable Share of the Acquisition/Construction
Financing with permanent mortgage financing, upon the conveyance of the TWI Unit to SSBTT the
Administrative Agent, on behalf of the Participants, will purchase the TWI Unit's Allocable Share
of the A/C Mortgage debt, and take an assignment of the portion of the A/C Mortgage securing such
debt, from the Acquisition/Construction Financing mortgagee; the TWI Unit will be conveyed to
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SSBTT subject to that indebtedness; and SSBTT, as mortgagor, and the Administrative Agent, as
mortgagee, will then amend and restate such portion of the A/C Mortgage to reflect the terms of the
Synthetic Lease. The portion of the A/C Mortgage that is severed and assigned to the Administrative
Agent is referred to as the “Participants’ Mortgage”; as amended and restated by SSBTT as
mortgagor and the Administrative Agent as mortgagee, this mortgage is referred to herein as the
"A/R Participants' Mortgage."
The parties anticipate that the assignment of the Participants’ Mortgage from the
Acquisition/Construction Financing mortgagee to the Administrative Agent for the benefit of the
Participants, the SSBTT Deed, the A/R Participants’ Mortgage, a Memorandum of Lease in respect
of the Lease, an Assignment of Lease to the Lenders, and possibly other instruments will all be
recorded. It is anticipated that these instruments will be recorded in the following sequence:
- As noted above, a mortgage securing the portion of the Acquisition/
Construction Financing that was advanced for the acquisition of the Land was
recorded at the time of such acquisition. - During the course of construction the LLC and the Acquisition/
Construction Lender will record one or more additional construction mortgages
securing the additional advances that are made under the Acquisition/Construction
Financing. - Prior to the conveyances of the Units by the LLC, the separate mortgages
granted and recorded under the Acquisition/Construction Financing will be
consolidated into a single A/C Mortgage. - The A/C Mortgage will then be severed into separate mortgages, one of
which will reflect the TWI Unit's Allocable Share of the proceeds advanced under the
Acquisition/Construction Financing. - That portion of the A/C Mortgage relating to the TWI Unit's Allocable
Share of the Acquisition/Construction Financing, i.e., the Participants' Mortgage, will
be assigned by the Acquisition/Construction Lender to the Administrative Agent. - Fee title to the TWI Unit will be conveyed to SSBTT subject to the
Participants' Mortgage.
[It is possible that Step 6, above, will precede Step 5; that has not yet been determined.]
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- SSBTT as mortgagor and the Administrative Agent as mortgagee will
amend and restate the Participants' Mortgage as the A/R Participant's Mortgage, and
will record the amended and restated A/R Participant's Mortgage. - The Parties will then record a Memorandum of Lease in respect of the
Lease, will enter into and record an Assignment of Lease to the Lenders, and may
execute and record such other instruments as may be required as supplemental
security for TWI's indebtedness to the Participants.
Following the conveyance of the TWI and Hotel Units as described above, Units 3-6, which
have the same beneficial owners, will continue to be subject to a single loan and blanket mortgage
in respect of their combined Allocable Shares of the Acquisition/Construction Financing.
Petitioner and the Other Members are working cooperatively to design the overall Project,
but Petitioner is closely involved in the design and development of the TWI Unit. In addition to the
LLC Operating Agreement, Petitioner, as Construction Agent, will enter into a Development
Agreement with an entity formed by The Related Companies, L.P. ("Related"), Apollo Real Estate
Investment Fund III, L.P., and Apollo Real Estate Investment Fund IV, L.P. (collectively "Apollo")
(such entity being the "Developer"). The Development Agreement will require the Developer to
provide all development and related services necessary to complete construction of the TWI Unit.
Related and Apollo, as the principals of the Developer, will provide a completion guaranty to the
Acquisition/Construction lender.
The TWI Development Agreement will set forth the plans and budget for construction of the
Unit, and will enable Petitioner to monitor and inspect the work. Pursuant to the Construction
Agency Agreement, Petitioner, and not SSBTT, is responsible for overseeing the construction of the
TWI Unit. Once the Project plans are finalized and approved by all the Members, there can be no
material design change affecting any Member's Unit without such Member's consent. The cost of
any changes requested by a Member will be allocated to that Member's Unit.
Subject to compliance with the terms of the Condominium Declaration, each Member will
have the sole and absolute authority to manage, lease, operate, fit-out and equip such Member's Unit.
Each Member will bear the costs of fitting out its own Unit. In case of the TWI Unit, as part of the
Synthetic Lease, Petitioner has assumed all of the "Rights and Obligations" of the TWC Member in
respect of the TWI Unit.
Upon substantial completion of each Unit, as defined in each Development Agreement, the
LLC Operating Agreement requires that record title to each Member's Unit be transferred to its
Owner. In the case of the TWI Unit, title will be conveyed to SSBTT, which will acquire and hold
title to the Unit pursuant to the terms of the Synthetic Lease. When title to all of the Members' Units
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has been transferred to SSBTT and the Other Members and the JLC Unit has been donated to J@LC,
LLC is to be dissolved and its legal existence will terminate.
Applicable Law and Regulations - Real Estate Transfer Tax
Section 1402 of the Tax Law imposes the real estate transfer tax on each conveyance of real
property or interest therein when the consideration exceeds five hundred dollars. The term
"conveyance" is defined in section 1401(e) of the Tax Law.
Subdivision (e) of section 1401 of the Tax Law provides, in part:
"Conveyance" means the transfer or transfers of any interest in real property
by any method, including but not limited to sale, exchange, assignment, surrender,
mortgage foreclosure, transfer in lieu of foreclosure, option, trust indenture, taking
by eminent domain, conveyance upon liquidation or by a receiver, or transfer or
acquisition of a controlling interest in any entity with an interest in real property.
Transfer of an interest in real property shall include the creation of a leasehold or
sublease only where (i) the sum of the term of the lease or sublease and any options
for renewal exceeds forty-nine years, (ii) substantial capital improvements are or may
be made by or for the benefit of the lessee or sublesse, and (iii) the lease or sublease
is for substantially all of the premises constituting the real property. Notwithstanding
the foregoing, conveyance of real property shall not include a conveyance pursuant
to devise, bequest or inheritance; the creation, modification, extension, spreading,
severance, consolidation, assignment, transfer, release or satisfaction of a mortgage;
a mortgage subordination agreement, a mortgage severance agreement, an instrument
given to perfect or correct a recorded mortgage; or a release of lien of tax pursuant
to this chapter or the internal revenue code.
Subdivision (f) of section 1401 of the Tax Law provides:
“Interest in the real property” includes title in fee, a leasehold interest, a
beneficial interest, an encumbrance, development rights, air space and air rights, or
any other interest with the right to use or occupancy of real property or the right to
receive rents, profits or other income derived from real property. . . .
Subdivision (b) of section 1405 of the Tax Law provides, in part:
The tax shall not apply to the following conveyances:
*
*
*
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July 26, 2001
- Conveyances which are or were used to secure a debt or other obligation;
*
*
*
- Conveyances to effectuate a mere change of identity or form of ownership
or organization where there is no change in beneficial ownership. . . .
Section 575.11 of the Real Estate Transfer Tax Regulations states in part:
(a) The following are examples of conveyances which are subject to the real
estate transfer tax.
*
*
*
(13) A conveyance of real property to an industrial development agency
(IDA) by a person who is not the beneficiary of the IDA financing, at the direction
of such beneficiary, with such beneficiary subsequently leasing the property from the
IDA, is subject to tax. In such a conveyance, the beneficiary of the IDA financing
and not the IDA is deemed to be the grantee, and therefore the exemption described
at section 575.9(c)(1) of this Part does not apply.
(14) A conveyance of real property by an IDA to a person who is not the
beneficiary of the IDA financing where such conveyance is made at the direction of
such beneficiary is subject to tax. In such a conveyance, the beneficiary of the IDA
financing is deemed to be the grantor of the conveyance.
*
*
*
(b) The following are examples of conveyances which are not subject to the
real estate transfer tax.
(1) A conveyance of real property by the beneficiary of the industrial
development agency (IDA) financing to the IDA, in connection with the receipt of
such financing is not subject to tax.
(2) A conveyance of real property by the IDA, as grantor, to the beneficiary
of the IDA financing, as grantee is not subject to tax.
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Conclusion - Real Estate Transfer Tax
Taking the LLC Operating Agreement and the Synthetic Lease together, the parties have
agreed that (i) Petitioner is the beneficial owner of the TWC Membership Interest in LLC; (ii)
Petitioner is the beneficial owner of the TWI Unit; (iii) until such time as the condominium
declaration has been filed, title to the Units comprising the Project shall be held by the LLC for the
benefit of their respective beneficial owners; and (iv) upon filing the condominium declaration, LLC
will convey title to the TWI Unit to SSBTT, which thereupon shall hold title to the TWI Unit as
security for the loan made by the Participants to Petitioner.
In substance, the conveyance of title to the TWI Unit by LLC to SSBTT effects two transfers:
the deemed conveyance of title by LLC to Petitioner, followed by the deemed conveyance of title
by Petitioner to SSBTT. The first such transfer, by LLC to Petitioner, is exempt from real estate
transfer tax as a conveyance that is a change in form with no change in beneficial ownership under
Section 1405(b)(6) of the Tax Law. Petitioner is the beneficial owner of the TWI Unit from the
inception of the Project. Petitioner also is the beneficial owner of the TWC Membership Interest
from the inception of the Project. SSBTT holds title to the TWC Membership Interest, and will
acquire title to the TWI Unit, pursuant to a financing arrangement with Petitioner, and not as the
beneficial owner of such Membership Interest or of the TWI Unit. The conveyance of the TWI Unit
by LLC to Petitioner that is in substance the first conveyance effected by the SSBTT Deed therefore
constitutes a change in form or identity of ownership with no change in beneficial ownership.
The second conveyance that is effected by the SSBTT Deed -- the deemed conveyance of title
by Petitioner to SSBTT -- is exempt from transfer tax as a financing transaction. The Transfer Tax
Statute explicitly states that conveyances that are used to secure a debt are not subject to transfer tax.
Section 1401(e) of the Tax Law states that a taxable "conveyance of real property" does not include
the "creation . . . assignment . . . release or satisfaction of a mortgage . . . ." Regulation §575.11(b)
gives two "examples of conveyances which are not subject to the real estate transfer tax." In
example (1), "[a] conveyance of real property by the beneficiary of the industrial development
agency (IDA) financing [i.e., the borrower, in this case Petitioner)] to the IDA [(i.e., the lender, in
this case SSBTT)] in connection with the receipt of financing . . . ." is not subject to transfer tax.
In example (2), "[a] conveyance of real property by the IDA [(i.e., SSBTT)] as grantor, to the
beneficiary of the IDA financing [i.e., Petitioner], as grantee . . . " is not subject to transfer tax.
The Synthetic Lease is substantively the same as the IDA financing discussed in the Transfer
Tax Regulations. In both types of transactions the lender acquires fee title to the security and leases
it to the borrower. The payments that are denominated rent constitute debt service, and the parties
intend, and their agreements provide for, the conveyance of title to the security to the lessee upon
termination of the lease. In both cases for Federal income tax purposes the parties treat the lessee
as the owner of the asset that constitutes the lender's security. In the Synthetic Lease title is
conveyed to SSBTT to secure a debt, and at the end of the lease term SSBTT conveys title to
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Petitioner in release or satisfaction of its security interest. Accordingly, neither the conveyance of
title to SSBTT nor the conveyance of title by SSBTT to Petitioner is subject to real estate transfer
tax.
For the same reason, the Lease is not subject to real estate transfer tax. While in form
SSBTT grants Petitioner a lease of real property coupled with an option, in substance the Lease is
another component of the financing transaction. As such, the Lease is not subject to real estate
transfer tax.
Thus, based upon the foregoing, with respect to issue (1) presented by Petitioner, the SSBTT
Deed will be treated as a transfer of title to the TWI Unit by LLC to Petitioner, followed by the grant
of a mortgage encumbering the TWI Unit by Petitioner, as mortgagor, to SSBTT, as mortgagee.
With respect to issue (2), the SSBTT Deed is exempt from real estate transfer tax pursuant
to Section 1402(b)(6) of the Tax Law as a transfer that is a change in form with no change in
beneficial interest.
With respect to issue (3), the lease is exempt from real estate transfer tax pursuant to Section
1405(b)(2) of the Tax Law as a conveyance which is used to secure a debt.
With respect to issue (4), the conveyance of fee title to the TWI Unit to Petitioner upon
termination of the synthetic lease is not subject to the real estate transfer tax pursuant to Section
1401(e) of the Tax Law, as such conveyance, in substance, constitutes a satisfaction of a mortgage.
Applicable Law and Regulations - Mortgage Recording Tax
Subdivisions 1, 1-a and 2 of Section 253 of the Tax Law impose taxes on the recording of
a mortgage of real property in the State measured by the principal debt or obligation, which is, or
under any contingency, may be secured at date of execution thereof or at any time thereafter. Also,
in addition to the Statewide mortgage recording taxes, Section 253-a of the Tax Law authorizes
New York City to impose a tax on the recording of mortgages of real property situated within
New York City.
Section 250.2 of the Tax Law defines the term "mortgage" as follows:
The term "mortgage" as used in this article includes every mortgage or deed
of trust which imposes a lien on or affects the title to real property, notwithstanding
that such property may form a part of the security for the debt or debts secured
thereby. An assignment of rents to accrue from tenancies, subtenancies, leases or
subleases of real property, within any city in the state having a population of one
million or more, given as security for an indebtedness, shall be deemed a mortgage
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of real property for purposes of this article. . . . A contract or agreement by which the
indebtedness secured by any mortgage is increased or added to, shall be deemed a
mortgage of real property for the purpose of this article, and shall be taxable as such
upon the amount of such increase or addition. . . .
Section 255.1(a) of the Tax Law provides as follows:
If subsequent to the recording of a mortgage on which all taxes, if any,
accrued under this article have been paid, a supplemental instrument or mortgage is
recorded for the purpose of correcting or perfecting any recorded mortgage, or
pursuant to some provision or covenant therein, or an additional mortgage is recorded
imposing the lien thereof upon property not originally covered by or not described
in such recorded primary mortgage for the purpose of securing the principal
indebtedness which is or under any contingency may be secured by such recorded
primary mortgage, such additional instrument or mortgage shall not be subject to
taxation under this article. . . unless it creates or secures a new or further
indebtedness or obligation other than the principal indebtedness or obligation secured
by or which under any contingency may be secured by the recorded primary
mortgage, in which case, a tax is imposed as provided by section two hundred fifty
three of this chapter on such new or further indebtedness or obligation.
Section 641.6(b) of the Mortgage Recording Tax Regulations states in part:
The following are examples of instruments which are mortgages when given
as security for a debt or the performance of an obligation:
(1) an instrument in the form of an absolute deed, which in fact is merely
security. . . .
Section 645.1(a) of the Mortgage Recording Tax Regulations states in part as follows:
A supplemental mortgage is an additional instrument or mortgage which is
recorded subsequent to the recording and prior to the discharge or satisfaction of a
prior primary mortgage on which all taxes, if any, accrued under article 11 of the
Tax Law have been paid, the terms of which make reference to the prior recorded
primary mortgage, and which is given and recorded:
(1) for the purpose of correcting or perfecting such prior recorded primary
mortgage;
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(2) pursuant to some provision or covenant in such prior recorded primary
mortgage;
(3) for the purpose of providing additional or further security for the payment
of the principal debt or obligation secured by the prior recorded primary mortgage by
spreading the lien of the prior recorded primary mortgage to additional real property
or by imposing a new lien on such additional real property (see section 645.2[c], [d],
[e], or [f] of this Part); or
(4) for the purpose of coordinating or consolidating the liens of prior recorded
primary mortgages to form a single and coordinate equal lien; or
(5) for the purpose of modifying a prior recorded primary mortgage, for
reasons including but not limited to the following:
(i) adjusting the term for the payment of the debt secured by the prior
recorded primary mortgage;
(ii) changing the interest rate on the debt secured by the prior
recorded primary mortgage;
(iii) substituting a new mortgagor for the mortgagor;
(iv) substituting a new mortgagee for the mortgagee due to an
assignment of the mortgage;
(v) evidencing a change in the amount of debt or obligation which is
secured or which under any contingency may be secured by the prior
recorded primary mortgage; or
(6) for the purpose of severing the lien(s) of a prior recorded primary
mortgage or mortgages into separate liens.
Section 645.2 of the Mortgage Recording Tax Regulations states in part:
(a) The recording of a supplemental mortgage is subject to the applicable
mortgage recording taxes. . . . to the extent that such mortgage creates or secures a
new or further indebtedness or obligation other than the principal indebtedness or
obligation secured or which under any contingency may be secured by the prior
recorded primary mortgage(s). . . .
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(b) For purposes of this subdivision, the principal indebtedness or obligation
secured by or which under any contingency may be secured by the prior recorded
primary mortgage is equal to the remaining principal indebtedness secured or which
under any contingency may be secured by such mortgage at the time that the
supplemental mortgage is executed or at any time thereafter.
Conclusion - Mortgage Recording Tax
Beth Israel Medical Center, Adv OP T & F, October 7, 1998, TSB-A-98(69)S, (3)R analyzes
the application of the mortgage recording tax to a nominal lease that in fact represents a financing
transaction. As stated in that Advisory Opinion, section 250.2 of the Tax Law defines the term
“mortgage,” and Regulation section 641.6(b)(1) includes among instruments which are mortgages
when given as security for a debt, “an instrument in the form of an absolute deed, which in fact is
merely security....”
Matter of Atlantic Cement Co. v. Murphy, 30 AD2d 456 (1968), aff’d 28 NY2d 502 (1971)
held that “an instrument which purports to be a conveyance of real property in fee may in fact be a
mortgage depending upon the circumstances surrounding the giving of such instrument.” Id., at 457.
In classifying the transaction as a mortgage in that case the Court looked to the parties’ intent, as
evidenced by their testimony, the surrounding circumstances, and the terms of their agreement, and
stated that: “The intention of the parties is the only true and infallible test.” Id., at 458.
In this Advisory Opinion, as in Atlantic Cement, the parties’ intent that the instrument for
the conveyance of real property constitute a financing is explicitly set forth in the documents and is
clear from the operative terms of the transaction as well.
Therefore, with respect to issue (5) it is concluded that the recordation of the SSBTT Deed
conveying the TWI Unit by LLC to SSBTT is for purposes of the mortgage recording tax treated as
(i) the conveyance by LLC to Petitioner of fee title to the TWI Unit, followed by (ii) the conveyance
by Petitioner to SSBTT of fee title to the TWI Unit as security for Petitioner’s indebtedness to the
Participants. Accordingly, the recordation of the SSBTT Deed is considered the recordation of a
mortgage encumbering the TWI Unit for purposes of the mortgage recording tax.
As noted above, Section 250 of the Tax Law provides that: “A contract or agreement by
which the indebtedness secured by any mortgage is increased or added to, shall be deemed a
mortgage of real property for the purpose of this article, and shall be taxable as such upon the amount
of such increase or addition.”
Section 255 of the Tax Law provides, in part:
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If subsequent to the recording of a mortgage on which all taxes, if any,
accrued under this article have been paid, a supplemental instrument or mortgage is
recorded...such additional instrument or mortgage shall not be subject to taxation
under this article. . . . unless it creates or secures a new or further indebtedness or
obligation other than the principal indebtedness or obligation secured by or which
under any contingency may be secured by the recorded primary mortgage. . . .
Under these statutory provisions, where a mortgage is already of record and the proper
amount of mortgage recording tax has been paid, the mortgage recording tax is imposed on the
recording of a supplemental instrument or mortgage only to the extent such instrument serves to
increase the amount of secured indebtedness beyond that which is secured by the primary recorded
mortgage
The courts have construed Sections 250, 253 and 255 of the Tax Law, to avoid double
taxation of assigned, supplemented, modified, or amended mortgages. For example, in Matter of
Bay View Towers Apts. v. State Tax Comm., 48 A.D.2d 86, 40 N.Y.2d 856, aff’d,, the Court of
Appeals affirmed that the tax was not applicable to the recording of a substitute mortgage agreement,
stating:
Applicable precedents establish that a mere substitution of one mortgage
agreement for another, even in combination with a change of mortgagors, is
insufficient to create a new mortgage for purposes of section 253 of the Tax Law. . .
Since no “new” mortgages were created in this case, there is no need to examine the
statutory exemption for supplemental mortgages.
In Matter of Fifth Avenue Corporation v. Bragalini, 4 A.D.2d 387, 165 N.Y.S.2d 312,
involving a loan purchased from the original lender, where the purchasing lender advanced
additional amounts to the borrower, the court held that mortgage recording tax was due only with
respect to the additional borrowings. The court stated:
It is true, as the State Tax Commission contends, that the indenture of
mortgage is not technically a supplemental mortgage within the terms of section 255
of the Tax Law but a mortgage agreement does not have to come within the technical
terms of that section in order to be exempted from the tax. . . An agreement
increasing the amount of a mortgage to secure an additional loan is exempt from tax
with respect to the amount of the pre-existing indebtedness under section 250 of the
Tax Law. That section provides that an “agreement by which the indebtedness
secured by any mortgage is increased or added to...shall be taxable as such upon the
amount of such increase or addition.” Under the basic taxing section, section 253,
as judicially construed, the tax is imposed upon an agreement modifying, extending
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or consolidating a mortgage or mortgages, only to the extent of any new “principal
debt or obligation” secured thereby.
In Matter of City of New York v. Procaccino, 46 A.D.2d 594, the court held that the
recording of a supplemental indenture that consolidated various mortgages, altered the applicable
interest rate, lengthened the repayment terms and dealt with different parties than were on the
original mortgage did not trigger a mortgage recording tax. The court noted that in that instance,
notwithstanding the significant modifications to the terms of the debt, as long as the parties are
careful not to extinguish the original indebtedness so as not to create a new indebtedness, no
mortgage recording tax should be incurred.
Moreover, no mortgage recording tax is incurred on the recording of a document “which does
no more than to formally complete a transaction which was fully contemplated at the time of, and
was part and parcel of, the original mortgage upon which the recording tax has already been paid.”
(200 E. 64th St. Corp. v. Manley, 44 A.D.2d 11)
The Acquisition/Construction Financing provides for the severance of the A/C Mortgage into
the Participants' Mortgage and the other mortgages securing the other Unit's Allocable Shares of such
financing, and provides for the assignment of the Participants' Mortgage to the Administrative Agent
in furtherance of the Synthetic Lease. The Participation Agreement and the Lease specifically set
forth the parties' intent that all of the transactions undertaken in connection with the Synthetic Lease
constitute a single financing by the Participants directly to TWI, and that SSBTT holds title to the
TWI Unit to secure TWI's obligations to repay the financing to the Participants.
Thus, with respect to issue (6) based upon the foregoing, it is concluded that:
- Assuming that the proper amount of mortgage recording tax has been paid on the
recording of the A/C Mortgage(s) granted by the LLC to the Acquisition/Construction Lender
pursuant to the Acquisition/Construction Financing, and that the consolidation and severance of the
A/C Mortgage do not create or secure any new or further indebtedness in addition to that on which
mortgage recording tax has been paid:
(a) The recording of an instrument which by its terms consolidates the separate
mortgages granted by the LLC to secure the Acquisition/Construction Financing into
a single A/C Mortgage will not be subject to additional mortgage recording tax;
(b) The recording of the agreement severing the A/C Mortgage into separate
mortgages securing the Units' respective Allocable Shares of the proceeds advanced
under the Acquisition/Construction Financing will not be subject to additional
mortgage recording tax; and
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(c) The recording of the assignment of the Participants' Mortgage by the
Acquisition/Financing Lender to the Administrative Agent as agent for the
Participants will not be subject to additional mortgage recording tax.
- The SSBTT Deed will be considered a supplemental instrument or mortgage recorded
pursuant to the recorded Participants' Mortgage. The recording of the conveyance of the SSBTT
Deed subject to the Participants' Mortgage will be subject to the mortgage recording tax only to the
extent that it creates or secures a new or further indebtedness or obligation over and above the
indebtedness or obligation secured by the recorded Participants' Mortgage. TWI did not borrow
under the Acquisition/Construction Financing to fund its Allocable Share of the Land acquisition
cost, but instead financed its Allocable Share of the Land Acquisition cost through the Synthetic
Lease facility, and initially secured such borrowing through a security interest in the TWC
Membership Interest in the LLC. As a result, the Participants' Mortgage will not have secured TWI's
Allocable Share of the Land acquisition cost. The SSBTT Deed will, however, secure TWI's
obligations under the Synthetic Lease to repay the approximately $120,000,000 Advance made
through the Synthetic Lease facility to fund TWI's share of the Land Acquisition Cost. Accordingly,
recording the SSBTT Deed will give rise to mortgage recording tax, but only to the extent the
SSBTT Deed secures an indebtedness that was not included in TWI's Allocable Share of the
Acquisition/Construction Financing secured by the Participant's Mortgage. - The recording of the amended and restated A/R Participants' Mortgage will be
supplemental to the recorded Participants' Mortgage and the SSBTT Deed, and will not secure any
additional indebtedness. It will therefore not be subject to any additional mortgage recording tax. - The recording of the Memorandum of Lease in respect of the Lease from SSBTT to TWI,
and of an Assignment of the Lease to the Administrative Agent as security for TWI's indebtedness
will likewise be supplemental to the recorded mortgages, and will not be subject to additional
mortgage recording tax.
DATED: July 26, 2001
/s/
Jonathan Pessen
Tax Regulations Specialist III
Technical Services Division
NOTE:
The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.
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