We're a joint venture between the U.S. Army and a private housing manager, formed under the federal Military Housing Privatization Initiative to rebuild military housing at Fort Hamilton. We'll issue bonds secured by a leasehold mortgage that the Army will execute and record as co-mortgagor. Is that mortgage exempt from New York's mortgage recording tax because the Army is a party?

Plain-English summary

Fort Hamilton Housing LLC is a Delaware limited liability company whose only two members are the U.S. Army and GMH Military Housing – Fort Hamilton LLC, a private housing manager. It was formed under the federal Military Housing Privatization Initiative (part of the 1996 Defense Authorization Act, 10 U.S.C. §§ 2871-2885) to demolish or rehabilitate deteriorated family housing at the Fort Hamilton Military Base, construct new housing, and manage it for military personnel and their families.

The Army will lease the land to the LLC for 50 years under a Ground Lease (no rent due), with title to housing improvements vesting in the LLC only for the lease term before reverting to the Army. Immediately after, the LLC will sublease the property back to the Army, which will then sub-sublease it back to the LLC — a layered structure through which the parties can pledge leasehold interests as mortgage security without encumbering the Army's own fee interest. The Army retains substantial control throughout: approving all housing designs, imposing access restrictions, requiring the LLC to purchase police/fire/utility services from the Army, and capping rents at the military's Basic Allowance for Housing.

To finance roughly $56 million in bonds for the rehabilitation, the LLC and the Army will jointly execute a Leasehold Mortgage pledging their respective interests as lessee/lessor across the three leases, with the Army — as mortgagor — executing and recording the mortgage on behalf of both itself and the LLC.

Article 11 mortgage recording tax regulations parallel the state-instrumentality exemption with one for the federal government: 20 NYCRR § 644.1(a)(2) exempts recording where the mortgagor or mortgagee is the United States or any of its agencies or instrumentalities, to the extent immune from taxation — reflecting the long-established doctrine that the federal government and its instrumentalities are immune from state taxation absent congressional consent (citing Department of Employment v. U.S.; United States v. State Tax Commission of Mississippi; Pittman v. Home Owners Loan Corporation). The Department drew a direct parallel to its own recent opinion in Battery Park City Authority (TSB-A-02(2)R), where a NEW YORK STATE instrumentality used an identical sublease/sub-sublease structure to secure mortgage financing as co-mortgagor without pledging its fee interest, and the resulting mortgage was fully exempt because the state instrumentality was a co-mortgagor who recorded the mortgage. Because the Army — an agency of the United States — will be named co-mortgagor and will execute and record the Leasehold Mortgage, and because the proceeds serve the Army's own governmental function (rehabilitating military family housing), the recording is exempt from New York mortgage recording tax.

What this means for you

Public-private joint ventures financing federal facilities on leased federal land

If a federal agency is genuinely a co-mortgagor (not just a nominal lessor) and executes/records the mortgage, the whole leasehold financing — even though it primarily benefits a private developer/manager partner — can be exempt from state mortgage recording tax, mirroring the treatment already established for NY State instrumentalities in similar sublease/sub-sublease structures.

Bond counsel structuring privatized military (or other federal) housing financing

The sublease-back/sub-sublease-back structure used here (and previously by Battery Park City Authority) lets the federal or state instrumentality secure financing with its leasehold interest, rather than its fee interest, while still qualifying for MRT exemption as co-mortgagor.

Common questions

Q: Does the private member of the joint venture (GMH) need to be tax-exempt for this ruling to apply?
A: No — what matters is that the Army itself is a genuine co-mortgagor and executes/records the mortgage; GMH's private, for-profit status doesn't affect the analysis.

Q: Is this the same exemption theory used for NY State agencies?
A: Yes — 20 NYCRR § 644.1(a)(2) (federal) is the direct parallel to § 644.1(a)(1) (NY State), and the Department expressly modeled its analysis on the Battery Park City Authority precedent for a state instrumentality using the same sublease-back structure.

Q: Can other privatized military housing projects rely on this specific opinion?
A: No. It binds the Department only as to this petitioner and these facts, though the reasoning would likely apply to similarly structured Military Housing Privatization Initiative deals with genuine federal co-mortgagor participation.

Citations and references

Statutes and regulations:

• Tax Law § 250(2) (mortgage definition; assignment of rents in a large city deemed a mortgage)
• 20 NYCRR § 641.6(b)(3) (a pledge of a lessee's leasehold interest as security for debt is a mortgage)
• 20 NYCRR § 644.1(a)(2) (exemption for United States/federal agency or instrumentality mortgagor or mortgagee, to the extent immune)
• 20 NYCRR § 644.1(a)(1) (parallel exemption for NY State agency/instrumentality/political subdivision)
• Military Housing Privatization Initiative, 10 U.S.C. §§ 2871-2885 (P.L. 104-106, 110 Stat. 186)

Case law and prior opinions cited:

• Matter of Hamilton, 148 N.Y. 310 (state/municipal property for public purposes not subject to taxation)
• Hotel Waldorf-Astoria Corp. v. State Tax Commission, 86 A.D.2d 330 (common-law state-agency immunity doctrine)
• Department of Employment v. United States, 385 U.S. 355 (1966); United States v. State Tax Commission of Mississippi, 421 U.S. 599 (1975); Pittman v. Home Owners Loan Corporation, 308 U.S. 21 (1939) (federal government/instrumentality immunity from state taxation absent congressional consent)
• Battery Park City Authority, TSB-A-02(2)R (June 5, 2002) (NY State instrumentality using identical sublease/sub-sublease structure as co-mortgagor; mortgage fully MRT-exempt)
• New York State Urban Development Corp., TSB-A-93(4)R (March 10, 1993) (state-agency common-law immunity)
• One Park Place Associates, TSB-A-82(1)M (May 24, 1982) (industrial development agency legal-title mortgages exempt)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/mortgage_rec_ao_2004.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/mortgage/a04_1r.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(1)R
Mortgage Recording Tax
April 28, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M040209A

On February 10, 2004, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Fort Hamilton Housing LLC, c/o Richard R. Upton, Esq., Patterson,
Belknap, Webb, & Tyler LLP, 1133 Avenue of the Americas, New York, NY 10036-6710.
The issue raised by Petitioner, Fort Hamilton Housing LLC, is whether the taxes imposed
by Article 11 of the Tax Law (the "mortgage recording tax") will be due upon the recording of any
mortgage on certain leasehold interests, described below, provided that (a) the proceeds of the
mortgage are used by Petitioner for the rehabilitation and reconstruction of military housing units
located at Fort Hamilton Military Base and (b) the United States Army executes and records the
mortgage on behalf of itself (as lessee under the sublease and lessor under the sub-sublease), and
Petitioner (as lessee, sublessor, and sub-sublessee, as discussed below).
Petitioner submits the following facts as the basis for this Advisory Opinion.
Introduction
The United States Army (the "Army") currently owns and operates a military family housing
facility, consisting of real property (the "Land") and improvements (together, the "Facility"), as part
of the Fort Hamilton Military Base. The Facility has deteriorated and is in need of considerable
repair and rehabilitation if the Army is to provide suitable housing to its personnel. As described
in greater detail below, the Army intends to lease the Land and transfer title to the improvements
for 50 years to Petitioner, a Delaware limited liability company, which will demolish or rehabilitate
the existing housing and improvements, construct new housing and improvements and rent the
housing to Army and other military personnel. The Army and GMH Military Housing – Fort
Hamilton LLC ("GMH "), a privately owned Delaware limited liability company, will be the only
members of Petitioner. In connection with obtaining bond financing needed for the rehabilitation
and construction of the Facility, Petitioner will sublease the Facility back to the Army which, in turn,
will sub-sublease the Facility back to Petitioner. Both the sublease and the sub-sublease will be for
terms of less than 49 years. No rent is required to be paid under any of the leases. A leasehold
mortgage will be recorded with respect to each of the three leases. The Army will execute and
record the leasehold mortgage on behalf of itself (as lessee under the sublease and lessor under the
sub-sublease), and the Army will execute and record the leasehold mortgage on behalf of Petitioner
(as lessee, sublessor and sub-sublessee).

-2­
TSB-A-04(1)R
Mortgage Recording Tax
April 28, 2004

A. The Project and the Housing Initiative
Like much of the Army's existing housing facilities across the country, the housing and
related improvements that form the Facility at the Fort Hamilton Military Base are drastically in
need of repair and rehabilitation. Petitioner was formed pursuant to the Military Housing
Privatization Initiative of the 1996 Defense Authorization Act (the “Housing Initiative") for the
purpose of designing, financing, constructing, rehabilitating, renovating, managing, operating and
maintaining suitable military residential housing units and related ancillary facilities for the Army
and other military personnel at the Facility (the activities and transactions concerning the Facility
collectively constitute the "Project").
The Housing Initiative provides for the ownership, operation and management of military
housing by non-governmental entities and authorizes the Department of Defense to invest through
limited partnerships or other eligible entities which own, operate, and manage the housing. See
P.L. 104-106 110 Stat. 186 (codified at 10 U.S.C. §§ 2871-2885). Specifically, the Housing
Initiative authorizes the Secretary of Defense to "enter into contracts for the lease of military family
housing units or military unaccompanied housing units to be constructed," and to "convey or lease
[existing] property or facilities (including ancillary supporting facilities) to eligible entities for
purposes of using the proceeds of such conveyance or lease to carry out activities" under the
Housing Initiative. See 10 U.S.C. §§ 2874(a), 2878(a).
B. Petitioner
The Army and GMH will be the only members of Petitioner. Petitioner will be governed by
an operating agreement (the "Operating Agreement"), which provides the Army with extensive
rights (described below). GMH will serve as the manager of Petitioner. The initial capital of
Petitioner will come from a capital contribution made by the Army and the proceeds of bonds
secured by the leasehold mortgage that is the subject of this request. GMH will not be required to
make any capital contribution to Petitioner for at least three years after the start of the Project, if
ever. The amount of GMH's capital contribution, if any, will be determined at a future date and will
be dependent upon future events, including varying construction and renovation costs incurred in
the early stages of the Project. GMH will not be entitled to receive any distributions from Petitioner
until it makes a capital contribution.
The Operating Agreement provides conditions and limitations on GMH's future distributions
from Petitioner. Once GMH makes its capital contribution, it will be eligible to receive its share of
distributions from available cash. Annual cash distributions are applied first to reduce debt, pay
incentive management fees, and pay interest on GMH's adjusted capital investment. The remaining
cash available for distribution will then be distributed 90% to the Army and 10% to GMH.
However, GMH's annual distributions may not exceed 16.5% of its capital contribution. Upon
dissolution, proceeds from the liquidation of Petitioner’s assets will be distributed in a similar

-3­
TSB-A-04(1)R
Mortgage Recording Tax
April 28, 2004

manner. The liquidating proceeds will be used to (1) pay off debts and set up reserves for
contingencies, (2) make certain distributions to GMH, and (3) make distributions to the Army and
GMH in accordance with the positive balances in their capital accounts. In the event proceeds from
the liquidation of Petitioner’s assets are insufficient to pay the distributions to GMH in (2) above,
the agreement provides that the Army will release certain funds under its control to pay them.
GMH will receive no compensation for its role as manager of Petitioner, although an affiliate
of GMH will receive a monthly property management fee over the term of the Project in return for
its management services.
Petitioner will contract for all necessary services, including architectural, engineering and
construction services, and will supervise demolition, renovation and construction, as applicable, of
the housing and ancillary facilities in accordance with plans approved by the Army. Following
construction, Petitioner will operate, manage and maintain the resulting residential units and related
ancillary facilities in close cooperation with the Army and subject to rules and regulations specified
by the Army for the remaining period of the ground lease (defined below). Additional rights and
obligations of the parties in the Project are set forth in the Operating Agreement and the ground
lease, which are summarized in the following paragraphs.
C. Proposed Transactions
The Army will lease the Land at the Fort Hamilton Military Base to Petitioner (the "Leased
Property") pursuant to a ground lease (the "Ground Lease") for 50 years, with a 25 year renewal
option. Pursuant to the Ground Lease, Petitioner will develop, maintain and operate the Facility.
Petitioner is not required to pay any rent under the Ground Lease. Immediately after execution of
the Ground Lease, Petitioner will sublease the Leased Property back to the Army (the "Army
Sublease"), and the Army will then immediately sub-sublease the Leased Property back to Petitioner
(the "Company Sublease"). Both the Army Sublease and the Company Sublease are tied to, and will
expire upon termination of, the leasehold mortgage defined below.
The Ground Lease will provide that title to certain housing and ancillary facilities currently
existing at the Facility (the "Existing Housing") will vest in Petitioner for no consideration. Title
will, however, revert back to the Army upon termination of the Ground Lease. Petitioner will be
obligated to demolish or substantially renovate most of the Existing Housing and to construct new
residential units, which are intended to house military personnel and their families, and ancillary
facilities, both pursuant to designs and specifications approved by the Army (the "New Housing")
(the Existing Housing and the New Housing are referred to collectively as the "Housing"). As will
be the case with the Existing Housing, title to the New Housing will vest in Petitioner pursuant to
the Ground Lease, but only for the term of the Ground Lease. All right, title and interest in the
Housing will revert to the Army upon expiration of the Ground Lease for no consideration.

-4­
TSB-A-04(1)R
Mortgage Recording Tax
April 28, 2004

D. Financing for the Project
To secure necessary financing to support the Project, Petitioner will issue approximately
$56 million of revenue bonds (the "Bonds") pursuant to a Master Indenture of Trust, Lockbox and
Servicing Agreement (the "Master Indenture"). The Army and Petitioner have agreed to pledge
certain interests in the Leased Property as security for the Bonds by executing a Mortgage,
Assignment of Rents, Security Agreement and Financing Statement to the Master Trustee under the
Master Indenture (the "Leasehold Mortgage"). The Leasehold Mortgage will have a term equal to
the term of Bonds, which is currently estimated at 43 years. Through the Leasehold Mortgage,
Petitioner will pledge its interests as lessee under both the Ground Lease and the Company Sublease
and its interests as lessor under the Army Sublease. In addition, the Army, as mortgagor, will pledge
its interests as lessee under the Army Sublease and as lessor under the Company Sublease. The
Army will execute the Leasehold Mortgage on behalf of itself and Petitioner, and, will record it as
required by the terms of the Leasehold Mortgage.
E. Army Control of the Project and Petitioner
Development of the Facility will be in furtherance of the Army's governmental functions.
Pursuant to the Ground Lease, the Project will be under the general supervision of the Army, and
certain actions undertaken by Petitioner will be subject to the Army's approval. As discussed above,
the Army must approve all designs and specifications for the New Housing, and Petitioner is
required to comply with all rules and regulations issued by the Army with respect to the Leased
Property. Furthermore, the Army will maintain a significant degree of control over the Facility
throughout the term of the Ground Lease. For instance: (1) the Army will have the right to enter
the Leased Property for any purpose; (2) the Army may impose restrictions on access to the Leased
Property by Petitioner; and (3) Petitioner is required to purchase from the Army or the Army's
designee all police, fire and utility services.
In addition, the Army will limit rental rates Petitioner is allowed to charge for military
personnel residing in the Housing to the applicable U.S. military service personnel “Basic
Allowance for Housing,” which is set on an annual basis by Congress and based upon such factors
as geographic location, pay grade and dependency status of military personnel. This is the same rent
currently paid by service members who live in the Existing Housing. Both the Army and Petitioner
expect that 100% of the Housing will be rented to military personnel, and, accordingly, that all rental
rates will be subject to the Basic Allowance for Housing.
Applicable law and regulations
Article 11 of the Tax Law imposes taxes on the recording of mortgages of real property
measured by the principal debt or obligation secured or which under any contingency may be
secured by the mortgage.

-5­
TSB-A-04(1)R
Mortgage Recording Tax
April 28, 2004
Section 250(2) of the Tax Law provides, in relevant part:
The term “mortgage”... 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 of real property for purposes of [Article 11 of the Tax Law]....
Section 641.6(b)(3) of the Mortgage Recording Tax Regulations (the “Regulations”)
provides that "an instrument pledging the lessee's interest in a lease" constitutes a mortgage when
given as security for a debt.
Section 644.1(a)(2) of the Regulations exempts the recording of "[m]ortgages where the
mortgagor or mortgagee is the United States of America or any of its agencies or instrumentalities,
to the extent immune from such taxes."
Section 644.1(a)(1) of the Regulations provides a similar exemption where the mortgagor
or mortgagee is New York State or any of its agencies, instrumentalities or political subdivisions.
It is well established that government (State) agencies enjoy an immunity from taxation
independent of the exemptions provided in the regulations for property utilized in the public interest.
(New York State Urban Development Corp., Adv Op Comm T&F, March 10, 1993, TSB-A-93(4)R)
In a March 29, 1913, opinion, the Attorney General opined that no mortgage recording tax
was due when New York State acted as mortgagor and quoted the following passage from Matter
of Hamilton, 148 NY 310, 313-314:
The property held by the state, or by any of its municipal divisions, for public
purposes, is not, and never has been, subject to taxation.... The end and object of all taxation
is to raise revenue for the purpose of defraying the expenses of government, and since no
revenue could be raised by imposing taxes on property owned by the state itself, or by any
of its political divisions, such property is in no just or practical sense the subject of
taxation....
This principle has been applied in exempting from the mortgage recording tax the recording
of mortgages on property the legal title of which is held by an industrial development agency and
the beneficial ownership of which is held by a non-exempt private party. (See 1982 Opns St Comp
No. 82-188, p 240; One Park Place Associates, Adv Op St Tx Comm, May 24 1982,
TSB-A-82(1)(M); New York State Urban Development Corp., supra.)

-6­
TSB-A-04(1)R
Mortgage Recording Tax
April 28, 2004
In Hotel Waldorf-Astoria Corp. v. State Tax Commission, 86 AD2d 330, 334, in
acknowledging that a $45 million mortgage secured by the Waldorf-Astoria hotel was exempt from
the mortgage recording tax because the mortgagee (the New York State Employees' Retirement
System) was a New York State agency, the court stated: "as a State agency, the Retirement System
enjoys an immunity from taxation independent of the statutory exemptions listed in Section 252 of
the Tax Law...."
Also, in an informal opinion of the Attorney General, dated March 7, 1956, it was stated that:
It should be noted that section 257 of Article 11 of the New York State Tax Law is
silent as to which party to the mortgage shall pay the tax. Under its terms the taxes shall be
payable on the recording of each loan subject to tax so that the party who records is the one
upon whom the tax is imposed.... (1956 Atty Gen [Inf Opns] 27, at 28.)
Opinion
Recently, Battery Park City Authority, Adv Op Comm T&F, June 5, 2002, TSB-A-02(2)R,
recognized an exemption from the mortgage recording tax where an agency or instrumentality of
New York State acts as either mortgagee or mortgagor. In particular, it was found that the petitioner
was a New York State development authority that owned most of the area of Manhattan known as
Battery Park City and was formed for the purpose of improving, replanning, reconstructing and
redeveloping that area. In accordance with its purposes, the authority entered into a number of
ground leases with private developers at different project sites. Costs of construction were to be
funded by developer equity as well as by proceeds of one or more financings secured by
mortgage( s) in which the development authority was a mortgagor. By virtue of a sublease from the
developer to the development authority and then a sub-sublease from the development authority
back to the developer, the development authority was able to secure the financings with its interests
in the sublease and the sub-sublease without pledging its fee simple interest in the property. The
advisory opinion concluded that the subject mortgage could be recorded without payment of
mortgage recording taxes on the ground that the State agency was a co-mortgagor and recorded the
mortgage.
Similar to the State agency in Battery Park City Authority, supra, the Army, an agency of
the United States of America, will enter into the Ground Lease with Petitioner for the purpose of
constructing, rehabilitating, renovating, managing and maintaining residential units and related
ancillary facilities at the Fort Hamilton Military Base, as authorized by Congress under the Housing
Initiative. Likewise, the Army will be named the co-mortgagor in one or more mortgages on the
leasehold interests and will be the party who records the mortgages. Given the provisions of section
644.1(a)(2) of the Regulations and the Attorney General’s opinion dated March 7, 1956, and in light
of the long established doctrine that the United States government, its agencies, and instrumentalities
are exempt from taxation unless such taxation has been consented to by Congress, the recording of

-7­
TSB-A-04(1)R
Mortgage Recording Tax
April 28, 2004
the mortgages by the Army in this case would be exempt from taxation (see Department of
Employment v. U.S., 385 U.S. 355 (1966); United States v. State Tax Commission of Mississippi,
421 U.S. 599 (1975); Pittman v. Home Owners Loan Corporation, 308 U.S. 21 (1939).
Accordingly, since the proceeds of the mortgage will used by Petitioner for a government
purpose, namely, the rehabilitation and reconstruction of military housing units located
at Fort Hamilton Military Base, and the Army will execute and record the leasehold mortgages as
a mortgagor, the mortgages may be recorded without payment of the mortgage recording taxes
imposed under and pursuant to Article 11 of the Tax Law.

DATED: April 28, 2004

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.