We're a 501(c)(3) nonprofit running four different disability-services programs at one leased building -- only one of which (a Diagnostic and Treatment Center) is a licensed 'hospital' under state law. We took out one leasehold mortgage to renovate the whole building. Does the mortgage recording tax exemption for nonprofit hospital corporations cover the WHOLE mortgage, or only the part used for the hospital program?

Plain-English summary

United Cerebral Palsy Associations of New York State, a 501(c)(3) nonprofit, operates programs for individuals with mental retardation and developmental disabilities across New York City and upstate counties, licensed by several state agencies. In June 2001 it closed a $2,412,000 leasehold mortgage with the Primary Care Development Corporation to renovate a Brooklyn premises housing four distinct programs: (1) a Diagnostic and Treatment Center licensed under Article 28 of the Public Health Law, providing physician-supervised services (40% of square footage); (2) a Day Habilitation Program for developmental disabilities, licensed by the Office of Mental Retardation and Developmental Disabilities (26.4%); (3) a Day Treatment Program, also OMRDD-licensed (14.2%); and (4) a Day Habilitation Program for Traumatic Brain Injury, Department of Health-licensed but not physician-supervised (4.2%) — plus shared common space (15.2%).

Tax Law § 253.3 exempts mortgages executed by a "voluntary nonprofit hospital corporation" from mortgage recording tax. A "hospital" under Public Health Law § 2801(1) is a facility principally providing physician-supervised services for diagnosis/treatment of disease or injury — and the Diagnostic and Treatment Center meets that definition, making Petitioner (as its operator) a voluntary nonprofit hospital corporation under 20 NYCRR § 644.1(b)(7) and Not-For-Profit Corporation Law § 102(a)(5). But the other three programs at the same premises don't meet the Public Health Law hospital definition (the Day Habilitation and Day Treatment programs aren't physician-supervised in the same way).

Citing Matter of Church Charity Foundation of Long Island v. State Tax Commission — where a nonprofit hospital corporation's construction mortgage for an ELDERLY HOUSING development (not hospital use) was held taxable because the exemption depends on the PURPOSE the proceeds serve, not merely the borrower's hospital-corporation status — the Department apportioned the exemption here by actual dollar use. Petitioner calculated that renovation costs directly attributable to the Diagnostic and Treatment Center, plus its reasonably apportioned share of common-space renovation costs, totaled $1,044,811, or 43.3% of the $2,412,000 mortgage. The Department confirmed that only this 43.3% portion — the hospital-related share — is exempt from mortgage recording tax; the remaining 56.7%, used for the non-hospital day programs, remains fully taxable.

What this means for you

Nonprofit organizations operating mixed hospital and non-hospital programs at one facility

Don't assume the section 253.3 hospital exemption covers your entire mortgage just because part of your operation qualifies as a licensed "hospital" — the exemption applies only to the PROPORTION of mortgage proceeds actually used for hospital-related purposes, calculated by directly-attributable costs plus a reasonable allocation of shared/common space costs.

Real estate and tax counsel structuring financing for multi-program nonprofit facilities

Build a defensible cost allocation methodology (by square footage and direct-cost tracing, as done here) at the time of financing, since you'll need it to support a partial exemption claim — a blanket exemption claim covering the full mortgage amount would likely be rejected on these facts.

Common questions

Q: Does operating ONE licensed hospital program at a facility make the ENTIRE mortgage exempt?
A: No — only the portion of mortgage proceeds attributable to that hospital program (plus its fair share of common space) is exempt; the rest is fully taxable.

Q: How is the exempt percentage calculated?
A: By tracing renovation costs directly to the hospital-qualifying program, adding a reasonable allocation of shared/common-space costs, and dividing by the total mortgage amount.

Q: Can another nonprofit with a similar mixed-use facility rely on this specific opinion?
A: No. It binds the Department only as to this petitioner and these facts, though the underlying Church Charity Foundation case law rule (purpose of use, not borrower status, controls) applies broadly.

Citations and references

Statutes and regulations:

• Tax Law § 253 (mortgage recording tax on real property mortgages); § 253-a (NYC local mortgage recording tax)
• Tax Law § 253.3 (exemption for mortgages executed by a voluntary nonprofit hospital corporation)
• 20 NYCRR § 644.1(b)(7) (ties the exemption to Public Health Law § 2801(1) hospital status and NFPCL § 102(5) corporation status)
• Public Health Law § 2801(1) (definition of "hospital")
• Not-For-Profit Corporation Law § 102(a)(5) (definition of "corporation")

Case law cited in the opinion:

• Matter of Church Charity Foundation of Long Island v. State Tax Commission, 91 A.D.2d 746 (section 253.3 exemption applies only to the extent mortgage proceeds are used for hospital-related purposes, not merely because the borrower is a nonprofit hospital corporation)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/mortgage_rec_ao_2002.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/mortgage/a02_3r.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-02(3)R
Mortgage Recording Tax
June 11, 2002

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M010815B

On August 15, 2001, the Department of Taxation and Finance received a Petition for
Advisory Opinion from United Cerebral Palsy Associations of New York State, 330 West 34th
Street, 13th Floor, New York, New York 10001 (herein referred to as “Petitioner”). Petitioner, United
Cerebral Palsy Associations of New York State, submitted additional information related to the
Petition on August 24, 2001, and September 18, 2001.
The issue raised by Petitioner is whether the exemption from the mortgage recording tax
provided in Section 253.3 of the Tax Law is applicable to a mortgage executed by Petitioner to
Primary Care Development Corporation.
Petitioner presented the following facts as the basis for this advisory opinion.
Petitioner is a New York not-for-profit corporation, which is exempt from federal income
tax pursuant to Section 501(c)(3) of the Internal Revenue Code. Petitioner operates programs and
services for individuals with mental retardation and developmental disabilities in New York City
and upstate counties. Petitioner operates programs licensed by, among others, the Department of
Health, State Education Department, Office of Children and Family Services (successor to the
Department of Social Services) and Office of Mental Retardation and Developmental Disabilities
(successor to the Department of Mental Hygiene).
On June 25, 2001, Petitioner closed on a leasehold mortgage with the Primary Care
Development Corporation in the amount of $2,412,000.00, which mortgage encumbers a leasehold
interest located at 921 East New York Avenue, Brooklyn, New York. Located in the premises are
four programs operated by Petitioner, with each program occupying a distinct area of the premises,
as follows.

1. A Diagnostic and Treatment Center licensed by the New York State Department of Health
   pursuant to Article 28 of the Public Health Law. The services provided in the Center are all
   provided by or under the supervision of a physician. This program occupies 40% of total square
   footage of the premises. Petitioner possesses operating authority to provide primary care services
   and other medical and clinical services at the premises. Specifically, the Certificate of Incorporation
   allows Petitioner to provide the following medical and clinical services:
   . . . to operate diagnostic and treatment centers and resident treatment facilities for the
   Cerebral palsied and persons with related mental disabilities or developmental disabilities,
   provided that before each such diagnostic and treatment center is open and operated, the
   Corporation shall first obtain all approvals required by Article 28 of the Public Health Law.

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TSB-A-02(3)R
Mortgage Recording Tax
June 11, 2002

2. A Day Habilitation Program for individuals with developmental disabilities licensed by
   the New York State Office of Mental Retardation and Developmental Disabilities. This program
   occupies 26.4% of total square footage.
3. A Day Treatment Program licensed by the New York State Office of Mental Retardation
   and Developmental Disabilities. This program occupies 14.2% of total square footage.
4. A Day Habilitation Program for individuals with Traumatic Brain Injury licensed by the
   New York State Department of Health, which includes case management and counseling. These
   services do not require physician supervision. This program occupies 4.2% of total square footage.
   Additionally, there is common space allocated to the programs. The common space accounts
   for 15.2% of the total square footage.
   The total cost of the renovations is $2,412,000. Of this amount, the total of the costs directly
   attributable to the renovation of the Diagnostic and Treatment Center and the cost of renovation of
   the common space reasonably apportioned to the Diagnostic and Treatment Center equals
   $1,044,811 or 43.3% of the leasehold mortgage of $2,412,000.
   Applicable Law and Regulations
   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 253.3 of the Tax Law provides:
   Notwithstanding any other provision of law to the contrary, the mortgage
   recording tax shall not be imposed upon any mortgage executed by a voluntary
   nonprofit hospital corporation or upon any mortgage executed by or granted to the
   dormitory authority.
   Section 644.1(b)(7) of the Mortgage Recording Tax Regulations provides, in part:
   For the purpose of this paragraph a voluntary non-profit hospital corporation
   is a hospital as such term is defined in section 2801(1) of the Public Health Law
   which operates as a corporation as such term is defined in section 102(5) of the
   Not-For-Profit Corporation Law (section 253[3] of the Tax Law);

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TSB-A-02(3)R
Mortgage Recording Tax
June 11, 2002

Section 2801(1) of the Public Health Law provides:
“Hospital” means a facility or institution engaged principally in providing
services by or under the supervision of a physician or, in the case of a dental clinic
or dental dispensary, of a dentist, for the prevention, diagnosis or treatment of human
disease, pain, injury, deformity or physical condition, including, but not limited to,
a general hospital, public health center, diagnostic center, treatment center, dental
clinic, dental dispensary, rehabilitation center other than a facility used solely for
vocational rehabilitation, nursing home, tuberculosis hospital, chronic disease
hospital, maternity hospital, lying-in-asylum, out-patient department, out-patient
lodge, dispensary and a laboratory or central service facility serving one or more
such institutions, but the term hospital shall not include an institution, sanitarium or
other facility engaged principally in providing services for the prevention, diagnosis
or treatment of mental disability and which is subject to the powers of visitation,
examination, inspection and investigation of the department of mental hygiene
except for those distinct parts of such a facility which provide hospital service. The
provisions of this article shall not apply to a facility or institution engaged principally
in providing services by or under the supervision of the bona fide members and
adherents of a recognized religious organization whose teachings include reliance on
spiritual means through prayer alone for healing in the practice of the religion of
such organization and where services are provided in accordance with those
teachings.
Section 102(a)(5) of the Not-For-Profit Corporation Law provides:
“Corporation” or “domestic corporation” means a corporation (1) formed
under this chapter, or existing on its effective date and theretofore formed under any
other general statute or by any special act of this state, exclusively for a purpose or
purposes, not for pecuniary profit or financial gain, for which a corporation may be
formed under this chapter, and (2) no part of the assets, income or profit of which is
distributable to, or enures to the benefit of, its members, directors or officers except
to the extent permitted under this statute.
Opinion
As noted above, section 253.3 of the Tax Law provides that the mortgage recording tax shall
not be imposed upon any mortgage executed by a voluntary non-profit hospital corporation. The
Diagnostic and Treatment Center operated by Petitioner is licensed by the New York State
Department of Health pursuant to Article 28 of the Public Health Law and provides services by or
under the supervision of a physician for the diagnosis or treatment of human disease, pain, injury,
deformity or physical condition. The Diagnostic and Treatment Center is considered a hospital
under section 2801 of the Public Health Law. As Petitioner is a not-for-profit corporation that is
providing hospital services, it is a voluntary non-profit hospital corporation.

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TSB-A-02(3)R
Mortgage Recording Tax
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However, in addition to providing hospital services at the premises encumbered by the
leasehold mortgage, Petitioner will also operate the following non-hospital programs: the Day
Habilitation Program for individuals with developmental disabilities, licensed by the New York
State Office of Mental Retardation and Developmental Disabilities; the Day Treatment Program,
licensed by the New York State Office of Mental Retardation and Developmental Disabilities; and
the Day Habilitation Program for individuals with Traumatic Brain Injury, which is licensed by the
New York State Department of Health, but does not provide services by or under the supervision
of physicians. These programs do not constitute hospitals for purposes of section 2801 of the Public
Health Law.
In the Matter of Church Charity Foundation of Long Island v. State Tax Commission,
91 A.D. 2d 746, the court upheld the Tax Department’s position that the exemption provided by
section 253.3 of the Tax Law was applicable only to the extent that mortgage proceeds are utilized
for hospital-related purposes. Church Charity Foundation had executed a construction mortgage for
the purpose of building a housing development for the elderly. The court held that it is the purpose
for which the mortgage was executed that determines applicability of the exemption in question and
not merely Church Charity Foundation’s status as a voluntary non-profit hospital corporation.
In the present case, Petitioner notes that the total expenditures for the Diagnostic and
Treatment Center, and the portion of common space reasonably apportioned to the Diagnostic and
Treatment Center, are equal to 43.3% of the leasehold mortgage of $2,412,000, or $1,044,811.
Accordingly, 43.3% of the amount secured by the leasehold mortgage is exempt from the mortgage
recording tax. The remainder of the mortgage proceeds are not utilized for hospital-related purposes
and are, therefore, subject to tax. See Matter of Church Charity Foundation of Long Island, supra.

DATED: June 11, 2002

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein