As part of a public 42nd Street/Times Square urban redevelopment project, I (a private landowner) am being asked to voluntarily deed my site to the state's development subsidiary for no money, with a simultaneous reversionary interest going to the City -- then lease it back for 40 years at $10/year rent, retaining all the practical costs, income, mortgage rights, and appreciation, with the site guaranteed to revert or be sold back to me at a nominal $10 option price. Even though a purchase option coupled with a lease is normally always a taxable conveyance regardless of term, does this three-step public-private redevelopment structure trigger New York's Real Estate Transfer Tax?

Plain-English summary

Empire State Development Corporation (ESDC, doing business as the New York State Urban Development Corporation) has run the 42nd Street Development Project since the 1980s — a major public-private redevelopment effort turning the Times Square area into office towers, entertainment/retail, and hotels across roughly 13 acres. ESDC's usual practice: acquire sites (often via condemnation), convey a "fee on limitation" to its wholly-owned subsidiary 42nd St. Development Project, Inc. ("42DP"), simultaneously convey a reversionary interest to the City of New York, and have 42DP ground-lease each site to a private developer who builds and operates it — with the City's reversionary rights typically triggering after substantial completion of improvements, at which point the City succeeds 42DP as lessor, and the ground leases generally grant the developer a purchase option.

Site 8 North (a parking lot on Eighth Avenue between West 41st and 42nd Streets) presented a wrinkle: the private developer, Milstein, already owned the site outright, so ESDC's usual condemnation-based acquisition process didn't fit. Instead, under a negotiated letter agreement, Milstein would voluntarily deed the fee on limitation to 42DP for no consideration, simultaneously conveying the reversionary interest to the City — bringing the site within the Project Plan's design/use rules (exempting it from ordinary City zoning) — and 42DP and Milstein would simultaneously enter a 40-year triple-net Ground Lease under which Milstein would develop, build, and operate a new building, paying only nominal $10/year rent plus payments in lieu of real estate/sales/mortgage-recording taxes and a historic-theater rehabilitation surcharge. The site would then revert or be reconveyed to Milstein through any of three paths: automatic reversion via the deed's Limitation at the 40-year term's end (co-terminous with the Ground Lease); Milstein's earlier exercise, after the 20th anniversary of construction completion, of a nominal $10 purchase Option; or early termination of the Ground Lease.

The Department first confirmed that ordinarily, a lease coupled with a purchase option is a taxable conveyance regardless of the lease's term (20 NYCRR §575.7(c)(1)) — so this three-step sequence would normally implicate RETT at multiple points. But applying the Tax Law §1405(b)(6) mere-change-of-form exemption, the Department found Milstein would remain the beneficial owner of Site 8 North throughout the entire arrangement: Milstein would keep all appreciation in the site's value, all rent and income from subleasing space to third parties, the right to place leasehold mortgages and keep the proceeds, the right to sell or transfer its interest (subject to City "Prohibited Person" and financial/experience vetting), the right to initiate and defend property tax assessment contests in its own name, and would be treated as the owner for financial reporting and federal/state/city income tax purposes. Meanwhile, the "Public Parties" (ESDC, 42DP, and the City) would have no obligation to maintain or improve the site, no interest in condemnation awards or Milstein's insurance proceeds, and their contractual remedies for a Milstein default were limited to liquidated damages and lien rights analogous to ordinary governmental enforcement powers (like tax liens), not true ownership recourse. Because record title would pass through 42DP purely to bring the site within the Project Plan's regulatory framework, not to shift real economic ownership, the Department held all three steps — the initial deed/reversionary-interest conveyance, the Ground Lease's creation, and the eventual reversion/reconveyance to Milstein — are exempt from RETT as conveyances effectuating a mere change of identity or form of ownership.

What this means for you

A public-private redevelopment structure can route title through a government entity without RETT, if beneficial ownership never really moves

If a private landowner deeds property to a government redevelopment subsidiary purely to bring the site within a public project's regulatory framework -- while a leaseback structure preserves the landowner's appreciation, income, mortgage rights, sale rights, and tax-ownership status throughout -- the whole sequence can qualify as a tax-free mere change of form, even though it involves multiple conveyances and a guaranteed reversion.

This overrides the usual "lease + purchase option = always taxable" rule -- but only on these specific facts

The general rule that a lease coupled with a purchase option is taxable regardless of term didn't save this structure from RETT scrutiny -- it was the SEPARATE mere-change-of-form analysis, resting on retained beneficial ownership, that produced the exemption. A ground lease/option structure without this level of retained economic ownership would not get the same result just by analogy.

Concrete indicators of "beneficial ownership never left" carry real weight

The Department's holding leaned on a long, specific list: retained appreciation, retained rental income, mortgage rights, sale rights (even if City-vetted), the right to contest tax assessments in your own name, and treatment as owner for financial reporting/income tax purposes -- while the government entities bore no maintenance obligations and had no claim on insurance/condemnation proceeds. Structuring a similar arrangement without most of these features risks losing the exemption.

Common questions

Q: If I deed my property to a government redevelopment entity as part of a public project, does the leaseback and eventual reversion get taxed like an ordinary sale-leaseback with a purchase option?
A: Not necessarily -- if you retain all the practical benefits and burdens of ownership (appreciation, income, mortgage rights, sale rights, tax-ownership treatment) throughout, the whole sequence can qualify for the mere-change-of-form RETT exemption, even though it involves a lease with a purchase option.

Q: Does receiving no cash consideration for the initial deed matter to this analysis?
A: It's consistent with (though not solely determinative of) the mere-change-of-form finding -- the Department noted Milstein received no monetary consideration for the original conveyance, alongside the extensive list of retained ownership rights.

Q: Do government "remedies" for a private developer's default under the ground lease suggest the government has a real ownership stake?
A: Not automatically -- the Department distinguished the Public Parties' contractual remedies here (liquidated damages, lien rights) as analogous to their GOVERNMENTAL enforcement powers (like tax liens), not evidence of a genuine ownership interest.

Citations and references

Statutes and guidance:

• Section 1402(a) of the Tax Law
• Section 1401(d) of the Tax Law
• Section 1401(e) of the Tax Law
• Section 1401(f) of the Tax Law
• Section 1405(b) of the Tax Law
• Section 575.7(c)(1) of the Real Estate Transfer Tax Regulations

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_2003.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a03_1r.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(1)R
Real Estate Transfer Tax
October 9, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M030422F

On April 22, 2003, a Petition for Advisory Opinion was received from New York State
Urban Development Corporation (d/b/a Empire State Development Corporation) and Milstein
Brothers 42nd Street LLC, 633 Third Avenue, New York, New York 10017.
The issue raised by Petitioners, New York State Urban Development Corporation (d/b/a
Empire State Development Corporation) (ESDC) and Milstein Brothers 42nd Street LLC (Milstein),
is whether certain conveyances, in connection with Empire State Development Corporation’s 42nd
Street Development Land Improvement Project (the Project) are exempt from real estate transfer tax
imposed pursuant to Article 31 of the Tax Law.
Petitioners submit the following facts as the basis for this Advisory Opinion.
The conveyances at issue are:

1. The conveyance by Milstein, a private entity, by one or more deeds, of a fee on limitation
   to 42nd St. Development Project, Inc. (42DP), a wholly owned subsidiary of ESDC, and,
   simultaneously, of a reversionary interest in Site 8 North (the Reversionary Interest) to the City of
   New York (City).
2. The creation of the ground lease of Site 8 North between 42DP and Milstein for a term
   of 40 years (the Ground Lease).
3. The reversion or reconveyance of Site 8 North to Milstein, effectuated by (a) the
   limitations contained in each of the deeds described in conveyance “1" above providing for the
   mandatory reversion to Milstein upon the expiration of a stated term of 40 years, which is
   co-terminous with the term of the Ground Lease (the Limitation), (b) the earlier exercise by
   Milstein, at any time after the 20th anniversary of the completion of construction of new
   improvements on Site 8 North, of a purchase option pursuant to the Ground Lease for a nominal
   exercise price of $10.00 (the Option) or (c) the earlier termination of the Ground Lease due to a
   default thereunder or otherwise (the Early Termination).
   In 1980, the City entered into a memorandum of understanding with ESDC for the
   redevelopment of the Project area, which is located in the West 42 Street/Times Square district. The
   redevelopment was conceived as a joint effort, to be implemented by public agencies and private
   developers designated by the City and ESDC. A comprehensive study and plan of the Project area,
   aimed at turning Times Square into a safe, lively center for entertainment, shopping, commuting,
   and business, was commissioned and completed in 1981. The plan (the Project Plan) was approved
   by ESDC and the City’s Board of Estimate in 1984.

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In 1986, pursuant to section 402 of the Business Corporation Law and section 6262 of the
New York State Urban Development Corporation Act (the UDC Act), ESDC created 42DP as a
wholly-owned subsidiary corporation of ESDC for the purpose of implementing the Project. The
Project involves the development of new office towers, entertainment/retail facilities, hotels, and
other improvements in the Project area, which ESDC has divided into various sites.
Pursuant to the Project Plan, ESDC has acquired or is currently in the process of acquiring,
generally through exercise of ESDC’s condemnation powers, fee title to approximately 13 acres of
land in midtown Manhattan. Upon acquisition of the respective sites, it has been the practice of
ESDC to convey title to the land and all buildings and improvements then or thereafter located
thereon to 42DP as a fee on limitation, subject to reversionary rights in such property simultaneously
conveyed by ESDC to the City. Such reversionary rights are triggered following substantial
completion of new improvements on the site or upon the occurrence of certain other events. Also
upon acquisition of a site, 42DP enters into a long-term ground lease for such site with a designated
developer that is responsible for developing the site, funding certain acquisition costs, and
undertaking certain improvements on and in connection with the site. Upon the exercise of its
reversionary rights, the City succeeds to the interest of 42DP as the lessor under the respective
ground leases. The ground leases generally grant a purchase option to the lessee thereunder.
Milstein is currently the fee owner of Site 8 North of the Project, a parcel located on the east
side of Eighth Avenue between West 41st and 42nd Streets. The site is currently comprised of a
parking lot and billboard sign but does not include buildings or other improvements. 42DP has
designated Milstein as the developer of Site 8 North.
However, because Milstein owns Site 8 North, certain aspects of ESDC’s customary
acquisition and conveyance process for the Project (e.g., condemnation) are inappropriate.
Accordingly, Milstein, 42DP, and the New York City Economic Development Corporation (acting
on behalf of the City) have entered into a letter agreement dated October 21, 2002. Under the terms
of the letter:

• Milstein would voluntarily convey by one or more deeds for no consideration, the
  fee on limitation to 42DP, and, simultaneously, the Reversionary Interest to the City.
• Simultaneously with such conveyances, 42DP and Milstein would enter into the
  Ground Lease, a 40 year “triple net” lease under which Milstein would develop, construct,
  and operate a new building at Site 8 North and retain all of the costs and burdens of
  ownership of Site 8 North throughout the lease term. Payments under the Ground Lease
  would be limited to (a) base rent in the nominal amount of $10.00 per year, (b) payments in
  lieu of real estate taxes, sales taxes and mortgage recording taxes, and (c) a theater surcharge
  relating to the rehabilitation of the historic 42nd Street mid-block theaters.

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• The fee interest in Site 8 North would revert or be reconveyed to Milstein in all
  events, by virtue of (a) the Limitation, (b) the earlier exercise by Milstein of the Option or
  (c) the Early Termination.
  Under section 6266 of the UDC Act, the conveyance of fee title to 42DP would bring Site
  8 North within the provisions of the Project Plan. Among other things, this would exempt the site
  from provisions of the City’s zoning resolution and instead impose certain design, use and operating
  guidelines applicable to the Project. While 42DP would hold record title to the site for these limited
  purposes, the Ground Lease, the Limitation and the Option, taken together would contemplate, and
  the parties to the transaction would intend, that Milstein would remain the beneficial owner of the
  site at all times. Under the terms of the Ground Lease, the Limitation and the Option, Milstein
  would be entitled to all the benefits and would bear all the burdens of ownership of Site 8 North.
  More specifically, any and all appreciation in the value of Site 8 North would accrue to the
  benefit of Milstein pursuant to the Limitation and the Option. Milstein would retain the right to lease
  space within the site to third parties and would retain all rent and other income required to be paid
  under any such lease. Milstein would have the right to place leasehold mortgages on its interest in
  the site and would retain the proceeds of any such mortgage. Milstein would have the right to sell
  or otherwise transfer its interest in the site, provided that its transferee is not a “Prohibited Person”
  under certain City guidelines and meets certain financial and experience criteria. As the beneficial
  owner of the site, Milstein would have the right in its own name to initiate and defend real estate
  assessment contests regarding the site. Furthermore, for financial reporting and federal, State and
  City income tax purposes, Milstein would be the owner of Site 8 North.
  ESDC, 42DP and the City (collectively, the “Public Parties”), on the other hand, would have
  no beneficial interest in Site 8 North. The Public Parties would have no obligation to improve,
  replace, service, adjust, repair, or maintain any portion of the site. The Public Parties would have
  no interest in any condemnation awards with respect to the site or any proceeds from insurance
  maintained by Milstein. Consequently, as among the Public Parties and Milstein, all condemnation
  awards or insurance proceeds would be the sole property of Milstein. Although the Ground Lease
  would provide the Public Parties with certain monetary remedies in the event of a default by
  Milstein thereunder (e.g., liquidated damages and the right to place liens on the property with respect
  to unpaid payments in lieu of real estate taxes and other unpaid amounts), such remedies are
  intended to be analogous to rights the Public Parties would have in their governmental capacity
  against private owners for similar defaults (e.g., levying fines and imposing tax liens).
  Further, Milstein would receive no monetary consideration for the original conveyance of
  the site to 42DP, and 42DP and the City would not assume any monetary obligations in respect of
  the site.

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Applicable law and regulations
Section 1402(a) of the Tax Law imposes the real estate transfer tax on each conveyance of
real property or interest therein and provides, in part:
A tax is hereby imposed on each conveyance of real property or interest
therein when the consideration exceeds five hundred dollars, at the rate of two
dollars for each five hundred dollars or fractional part thereof; provided, however,
that with respect to (A) a conveyance of a one, two or three-family house and an
individual residential condominium unit, or interests therein; and (B) conveyances
where the consideration is less than five hundred thousand dollars, the consideration
for the interest conveyed shall exclude the value of any lien or encumbrance
remaining thereon at the time of conveyance.
Section 1401(d) of the Tax Law provides, in part:
“Consideration” means the price actually paid or required to be paid for the
real property or interest therein, including payment for an option or contract to
purchase real property, whether or not expressed in the deed and whether paid or
required to be paid by money, property, or any other thing of value. It shall include
the cancellation or discharge of an indebtedness or obligation. It shall also include
the amount of any mortgage, purchase money mortgage, lien or other encumbrance,
whether or not the underlying indebtedness is assumed or taken subject to.
(i) In the case of the creation of a leasehold interest or the granting of an
option with use and occupancy of real property, consideration shall include but not
be limited to the value of the rental and other payments attributable to the use and
occupancy of the real property or interest therein, the value of any amount paid for
an option to purchase or renew and the value of rental or other payments attributable
to the exercise of any option to renew.
Section 1401(e) 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 sublessee, and (iii) the lease or
sublease is for substantially all of the premises constituting the real property.

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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.
Section 1401(f) 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. It shall also include
an option or contract to purchase real property. It shall not include a right of first
refusal to purchase real property.
Section 1405(b) of the Tax Law provides, in part:
The tax shall not apply to the following conveyances:
*

*

*

6. Conveyances to effectuate a mere change of identity or form of ownership
   or organization where there is no change in beneficial ownership, other than
   conveyances to a cooperative housing corporation of the real property comprising
   the cooperative dwelling or dwellings;
   Section 575.7(c)(1) of the Real Estate Transfer Tax Regulations (Regulations) provides:
   An option to purchase real property is an interest in real property. Where an
   option to purchase real property is coupled with the granting of the right to use and
   occupancy of the real property, a conveyance subject to the transfer tax has occurred.
   Therefore, the creation of a lease coupled with the granting of an option to purchase
   the real property, regardless of the term of the lease, is a conveyance subject to the
   transfer tax.
   Opinion
   Section 1402 of the Tax Law imposes a tax on each conveyance of real property or interest
   therein when the consideration exceeds five hundred dollars. Section 1401(e) defines the term
   “conveyance,” in part, as the transfer or transfers of interest in real property or the transfer or
   acquisition of a controlling interest in any entity with an interest in real property. Section 1401(f)
   provides that “interest in the real property” includes an option or contract to purchase real property.
   Transfer of an interest in real property shall include the creation of a leasehold or sublease coupled

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with the granting of an option to purchase the real property. See section 575.7(c)(1) of the
Regulations.
The three conveyances at issue are deemed conveyances within the meaning of section
1401(e) of the Tax Law. However, section 1405(b)(6) of the Tax Law provides an exemption from
the transfer tax to the extent that a conveyance effectuates a mere change of identity or form of
ownership or organization where there is no change in beneficial ownership.
Under the terms of the Ground Lease, the Limitation and the Option, Milstein would be
entitled to all the benefits and would bear all the burdens of ownership of Site 8 North. Any and all
appreciation in the value of Site 8 North would accrue to the benefit of Milstein pursuant to the
Limitation and the Option. Milstein would retain the right to lease space within the site to third
parties and would retain all rent and other income required to be paid under any such lease. Milstein
would have the right to place leasehold mortgages on its interest in the site and would retain the
proceeds of any such mortgage. Milstein would have the right to sell or otherwise transfer its
interest in the site. Petitioner represents that as the beneficial owner of the site, Milstein would have
the right in its own name to initiate and defend real estate assessment contests regarding the site.
Furthermore, for financial reporting and federal, State and City income tax purposes, Milstein would
be the owner of Site 8 North. The Public Parties would have no obligation to improve, replace,
service, adjust, repair, or maintain any portion of the site. The Public Parties would have no interest
in any condemnation awards with respect to the site or any proceeds from insurance maintained by
Milstein. Consequently, as among the Public Parties and Milstein, all condemnation awards or
insurance proceeds would be the sole property of Milstein.
Accordingly, based upon the preceding paragraph, Milstein would remain the beneficial
owner of the site at all times.
Therefore, (1) the conveyance of the fee on limitation for Site 8 North to 42DP, and
simultaneously of the Reversionary Interest to the City, (2) the creation of the Ground Lease
between 42DP and Milstein, and (3) the reconveyance of Site 8 North to Milstein by Limitation,
Option, or Early Termination are all exempt from the real estate transfer tax as conveyances that
constitute a mere change of identity or form of ownership or organization pursuant to section
1405(b)(6) of the Tax Law.

DATED: October 9, 2003

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.