The Army is leasing land at Fort Hamilton Military Base to our LLC for 50 years (no rent) so we can demolish and rebuild deteriorated military family housing, with the Army and a private developer (GMH) as our only two members. The Army will hold no less than 90% of the beneficial interest in the underlying property, with GMH acquiring no more than 10% as its share for managing and eventually capital-contributing to the project. Because this is federal military property and the Army pays no consideration for our lease, is any part of this conveyance subject to New York's Real Estate Transfer Tax?

Plain-English summary

Under the federal Military Housing Privatization Initiative (10 U.S.C. §§ 2871-2885), the Army planned to address deteriorated family housing at Fort Hamilton Military Base by leasing the land and transferring title to existing improvements to Fort Hamilton Housing LLC ("Petitioner") — a Delaware LLC whose only two members would be the Army itself and GMH Military Housing – Fort Hamilton LLC, a private developer. Under a 50-year Ground Lease (plus a 25-year renewal option), with no rent required, Petitioner would demolish or renovate the existing housing, build new military housing per Army-approved designs, and rent it to military personnel at rates capped by the federally-set Basic Allowance for Housing. Title to both existing and new housing would vest in Petitioner only for the Ground Lease's term, reverting to the Army for no consideration at expiration. As part of bond financing for the project, Petitioner would also sublease the property back to the Army, which would immediately sub-sublease it back to Petitioner — both subleases for under 49 years and rent-free, tied to a leasehold mortgage securing the financing.

Structurally, the Army would fund Petitioner's initial capital (plus bond proceeds), while GMH would serve as managing member without any required capital contribution for at least three years (if ever) — GMH's eventual contribution amount would depend on future construction/renovation costs. GMH would receive no distributions until making its contribution, after which annual cash (and liquidation proceeds) would generally split 90% to the Army / 10% to GMH, with GMH's take capped at 16.5% of its own contribution. Major decisions required unanimous Army/GMH approval, but day-to-day management was GMH's exclusively.

Federal preemption argument rejected. Petitioner argued the Facility wasn't subject to state taxation at all. The Department disagreed: RETT is a transaction tax on conveyances, not an ad valorem property tax, and New York courts have historically upheld state taxing jurisdiction over private interests in federally-controlled military land (Matter of Fort Hamilton Manor, Inc. v. Boyland, 4 N.Y.2d 192 (1958); Matter of Black River Limited Partnership v. Astafan, 166 A.D.2d 914 (4th Dept. 1990)). Petitioner's reliance on 10 U.S.C. §2878(d) (which exempts these conveyances from certain federal "property management laws," including 10 U.S.C. §2667) didn't reach RETT, since that carve-out doesn't specifically address state transfer taxes. Because the Army itself is exempt from RETT (Tax Law §1405), any actual tax liability falls on Petitioner as the non-exempt grantee, not the Army.

Partial mere-change-of-form / partial taxable contribution. The Department held the transfer qualifies for the Tax Law §1405(b)(6) mere-change-of-form exemption only to the extent of the Army's own retained interest. Because GMH — as Petitioner's managing member with substantial control over the assets and a genuine (if contingent) right to future distributions — represents an actual, if partial, shift of beneficial ownership away from sole Army control, the transaction is analogous to a partner's taxable contribution of property to a partnership (20 NYCRR §575.11(a)(8)), taxable to the extent of the beneficial-interest change. On the facts, the Army would retain no less than 90% and GMH would acquire no more than 10% of the underlying beneficial interest. Although the Ground Lease itself provides for zero rent (meaning no rental-based consideration under the usual present-value formula), the Department found the real consideration for RETT purposes is the value of the LLC membership interest GMH receives, with the taxable portion of the real property's value apportioned to match the percentage of beneficial interest that actually shifted to GMH.

What this means for you

Leasing federal/military land to a joint public-private entity doesn't escape state transfer tax just because it's federal property

New York courts have long recognized state taxing jurisdiction over private interests in federally-controlled land, and a federal statute exempting certain "property management laws" doesn't automatically exempt state transfer taxes -- read the specific federal exemption language carefully rather than assuming broad preemption.

A joint government/private LLC conveyance is taxed proportionally to the PRIVATE member's beneficial share, not the whole value

Where a public entity contributes property to an LLC it co-owns with a private developer, RETT applies only to the portion of beneficial ownership that genuinely shifts to the private member -- here capped at GMH's maximum 10% profit share -- not to 100% of the property's value, even though legal title to the whole property vests in the LLC.

Zero rent under a long-term ground lease doesn't mean zero RETT consideration

Even where a taxable long-term lease provides for no rental payments (so there's no present-value-of-rent consideration), the Department can still find taxable consideration elsewhere -- here, in the value of the membership interest the private co-member receives in the entity that holds the leasehold.

Management control, not just capital contribution timing, drives the beneficial-ownership analysis

GMH's status as exclusive day-to-day manager and its contingent-but-real right to future distributions were enough to establish a genuine partial change in beneficial ownership, even though GMH hadn't yet made any capital contribution and might not for years -- delay in funding doesn't delay the tax analysis of control and economic rights already granted.

Common questions

Q: Does federal ownership of military housing land automatically exempt a redevelopment lease from New York transfer tax?
A: No -- RETT is a transaction tax, not a property tax, and New York courts have upheld state taxing authority over private interests in federally-controlled land absent specific federal preemption language covering transfer taxes.

Q: If a government agency and a private company are the only two members of an LLC receiving property, is the whole conveyance taxable?
A: Only the portion representing the private member's actual beneficial interest -- the portion that remains with the government member (here, at least 90%) qualifies for the mere-change-of-form exemption, while the private member's minority share (here, up to 10%) is taxable.

Q: If a long-term ground lease requires no rent payments, does that mean there's no RETT to pay?
A: Not necessarily -- if the lease is otherwise taxable and consideration can't be found in rental payments, the Department can look elsewhere, such as the value of an ownership/membership interest received in exchange for the property.

Citations and references

Statutes, guidance, and case law:

• 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 of the Tax Law
• Section 575.7(b) of the Regulations
• Section 575.9 of the Regulations
• Section 575.10 of the Regulations
• Section 575.11(a)(7) of the Regulations
• Section 575.11(a)(8) of the Regulations
• 10 U.S.C. § 2667
• 10 U.S.C. § 2872
• 10 U.S.C. § 2874(a)
• 10 U.S.C. § 2878
• Matter of Fort Hamilton Manor, Inc. v. Boyland, 4 N.Y.2d 192 (1958)
• Matter of Black River Limited Partnership v. Astafan, 166 A.D.2d 914 (4th Dept. 1990)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_2004.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a04_3r.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-04(3)R
Real Estate Transfer Tax
August 5, 2004

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M040209B

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 certain conveyances,
in connection with the rehabilitation and reconstruction of military housing units located at Fort
Hamilton Military Base are exempt from the real estate transfer tax imposed pursuant to Article 31
of the Tax Law.
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).
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

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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
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.
Where not otherwise provided in the Operating Agreement, every aspect of Petitioner’s
affairs shall be managed exclusively by GMH. In addition, major decisions will require unanimous
approval by the Army and GMH, including the sale of all or substantially all of the assets of

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Petitioner, the sale or disposal of the Project, and the pledge or other encumbering of Petitioner’s
assets except in conjunction with the financing.
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 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.
D. 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,

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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
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;...
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 a 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:

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"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.
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 of the Tax Law provides, in part:
(a) The following shall be exempt from payment of the real estate transfer tax:

1. The state of New York, or any of its agencies, instrumentalities, political
   subdivisions, or public corporations (including a public corporation created pursuant to
   agreement or compact with another state or the Dominion of Canada).
2. The United Nations, the United States of America and any of its agencies and
   instrumentalities.
   The exemption of such governmental bodies or persons shall not, however, relieve
   a grantee from them of liability for the tax.
   (b) The tax shall not apply to the following conveyances:
3. Conveyances to the United Nations, the United States of America, the state of
   New York, or any of their instrumentalities, agencies or political subdivisions...;
   *

*

*

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4. Conveyances of real property without consideration and otherwise than in
   connection with a sale, including conveyances conveying realty as bona fide gifts;
   *

*

*

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(b) of the Real Estate Transfer Tax regulations (the “Regulations”) provides,
   in part:
   Consideration in the case of the creation of a taxable lease or sublease.
   (1) In the case of the creation of a lease which constitutes a conveyance subject to
   tax, the consideration used to compute the tax is the present value of the right to receive
   rental payments or other payments attributable to the use and occupancy of the real property.
   Such consideration also includes the present value of rental or other payments attributable
   to any renewal term. In the case of the creation of a taxable sublease, the consideration is
   computed in the same manner as in the creation of a taxable lease except that the value of
   the remaining prime lease rental payments must be subtracted.
   Section 575.9 of the Regulations provides, in part:
   Exemptions and non-taxable transactions.
   (a) Certain governmental organizations or entities are exempt from the payment of
   the real estate transfer tax. In addition, there are certain types of transactions to which this
   tax does not apply.
   (b) The exemption for certain governmental organizations or entities does not extend
   to the grantee: that is, if the exempt governmental entity conveys title to real property to a
   nonexempt individual or entity, there will be a tax due which is payable by the grantee. The
   exemption for governmental organizations or entities includes the following:
   (1) the State of New York, or any of its agencies, instrumentalities, political
   subdivisions, or public corporations including a public corporation created pursuant to
   agreement or compact with another state or the Dominion of Canada. A public corporation
   includes a public benefit corporation such as the Urban Development Corporation. (For a full
   definition of public corporation, see section 66 of the General Construction Law);
   (2) the United Nations; and

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(3) the United States of America and any of its agencies or instrumentalities.
(c) In addition to the exemptions described in subdivision (b) of this section, certain
transactions are not subject to the real estate transfer tax. These include:
(1) conveyances to any of the governmental organizations or entities described in
subdivision (b) of this section, including any instrumentality or agency of the United
Nations;
*

*

*

(4) conveyances without consideration and otherwise than in connection with a sale,
including conveyances by bona fide gift;
Section 575.10 of the Regulations provides, in part:
To the extent that a conveyance effectuates a mere change of identity or form of
ownership or organization and there is no change in beneficial ownership, the real estate
transfer tax does not apply.
Examples of transactions where the issue of change in beneficial ownership would
arise include the following:
*

*

*

(d) the conveyance by a person to a partnership in exchange for an interest in the
partnership. Such conveyance is not taxable to the extent of the grantor’s interest in the
partnership.
Section 575.11 of the Regulations provides, in part:
(a) The following are examples of conveyances which are subject to the real estate
transfer tax.
*

*

*

(7) A conveyance by the United Nations, the United States of America, the State of
New York, or any of their agencies, instrumentalities or political subdivisions is subject to
tax unless the grantee is another of such governmental organizations or entities.
(8) A conveyance by a partner to the partnership as a contribution of partnership
assets is subject to tax to the extent that there is a change in beneficial ownership.
Title 10 of the United States Code (“10 U.S.C.”) § 2667, provides, in part:

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Leases: non-excess property of military departments
(a) Whenever the Secretary of a military department considers it advantageous to the
United States, he may lease to such lessee and upon such terms as he considers will promote
the national defense or be in the public interest, real or personal property that is (1) under the control of that department; and
(2) not excess property, as defined by section 102 of title 40.
*

*

*

(e) The interest of a lessee of property leased under this section may be taxed by
State or local governments. A lease under this section shall provide that, if and to the extent
that the leased property is later made taxable by State or local governments under an Act of
Congress, the lease shall be renegotiated.
10 U.S.C. § 2872 provides:
General authority
In addition to any other authority provided under this chapter for the acquisition or
construction of military family housing or military unaccompanied housing, the Secretary
concerned may exercise any authority or any combination of authorities provided under this
subchapter in order to provide for the acquisition or construction by eligible entities of the
following:
(1) Family housing units on or near military installations within the United States and
its territories and possessions.
(2) Military unaccompanied housing units on or near such military installations.
10 U.S.C. § 2874(a) provides:
(a) Lease Authorized. The Secretary concerned may enter into contracts for the lease
of housing units that the Secretary determines are suitable for use as military family housing
or military unaccompanied housing.
10 U.S.C. § 2878, which provides for the conveyance or lease of existing property
and facilities, provides in part:
(a) Conveyance or Lease Authorized. The Secretary concerned may convey or lease
property or facilities (including ancillary supporting facilities) to eligible entities for

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purposes of using the proceeds of such conveyance or lease to carry out activities under this
subchapter.
*

*

*

(d) Inapplicability of certain property management laws. The conveyance or lease of property or facilities under this section shall not be
subject to the following provisions of law:
(1) Section 2667 of this title.
Opinion
Petitioner proposes that the transactions described above are not subject to the real estate
transfer tax because the Facility is not subject to state taxation. Petitioner further asserts that the
transfer pursuant to the Ground Lease is exempt under the provisions of the real estate transfer tax
because no consideration is payable according to the terms of the Ground Lease and because the
transfer to Petitioner under the Ground Lease is a mere change of form or identity of ownership.
A. Whether the Facility is Subject to State Taxation
The issue of taxability of private interests in land on a military installation that is subject to
exclusive federal jurisdiction has been addressed by the New York courts in the context of real
property tax assessments. These decisions have historically found that the State possessed the
requisite jurisdiction to tax such private interests. (See Matter of Fort Hamilton Manor. Inc. v.
Boyland, 4 NY2d 192 [1958]; Matter of Black River Limited Partnership v. Astafan, 166 A.D. 2d
914 (4th Dept 1990).) These cases relied upon federal law which clearly permitted the ad valorem
taxation by a state or local government of the property interest of a lessee.
Petitioner contends that 10 U.S.C. § 2878 renders the provisions of 10 U.S.C. §2667(e),
which among other provisions provides for state and local taxation of the property interests of
tenants to which the government has leased property for the purpose of promoting national defense
or the public interest, inapplicable to the facts surrounding the transactions presented in this case.
However, 10 U.S.C. § 2878(d) is concerned with the inapplicability of certain property management
laws, and does not specifically reference laws which provide for taxes upon the conveyance of real
property. Petitioner has not demonstrated any other provisions contained in the Housing Initiative
which explicitly address the issue of private interests in land on military installations. As such, it
appears that 10 U.S.C. § 2878 does not support exclusive federal preemption over the taxation of
private interests in real property on a military base.
The real estate transfer tax is not an ad valorem or real property tax. Rather, it is a
transaction tax that is imposed on the conveyance of real property or an interest in real property.
Absent any federal preemption of state taxation in this case, the plain language of the Tax Law and

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the Regulations clearly provides that the conveyances in this case are subject to tax. Based on the
provisions clearly articulated in sections 1402 and 1405 of the Tax Law and in sections 575.9(a) and
(b) and 575.11(a)(7) of the Regulations, it is clear that in imposing a tax on conveyances from a
government organization or entity, such as the Army, to a non-exempt party, such as Petitioner,
New York State is not taxing the federal government. However, it is also clear that, because of the
exemption applicable to the Army, any tax due in this case would be payable by Petitioner.
B. Whether the Transactions Represent a Mere Change of Identity for No Consideration
Mere Change of Identity
Based on section 1405(b)(6) of the Tax Law and section 575.10 of the Regulations, the
conveyances described in this Advisory Opinion are not subject to tax to the extent of the Army’s
interest in Petitioner. From the information provided, there are only two members of Petitioner, the
Army and GMH. Where not otherwise provided in the Operating Agreement, every aspect of
Petitioner’s affairs shall be managed exclusively by GMH. In addition, major decisions will require
unanimous approval by the Army and GMH, including the sale of all or substantially all of the assets
of Petitioner, the sale or disposal of the Project, and the pledge or other encumbering of Petitioner’s
assets except in conjunction with the financing.
In addition, upon formation of Petitioner, GMH received the right to receive future
distributions, contingent upon its making a capital contribution at a later date. Thus, at the time of
the conveyance, GMH will hold an economic interest in the form of a right to future distributions
which is contingent only upon events under its own control. Generally, available cash from
operations (as well as dissolution) will be distributed 90% to the Army and 10% to GMH, but
GMH's share will be limited to 16.5% of its capital contribution.
From the information provided, it appears that there will be a partial change in beneficial
ownership upon the conveyance from the Army to Petitioner. As managing member of Petitioner,
GMH will have substantial influence and control of Petitioner’s assets, including the management
and disposition of the real property. Such influence and control is held solely by the Army prior to
the conveyance, but is shared equally after that time.
Since the provisions of the operating agreement are complex, and the distribution of proceeds
is based upon future contingencies, it is difficult to measure the change in beneficial interest from
an economic perspective. However, it does appear that the Army will retain no less than a 90%
interest in the underlying real property, and GMH will acquire not more than a 10% interest in the
underlying real property.
Consideration
Pursuant to section 1401(e) of the Tax Law, the Ground Lease is a conveyance of real
property subject to tax because the sum of the term of the lease including options for renewal
exceeds 49 years, substantial capital improvements are or may be made by or for the benefit of the

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TSB-A-04(3)R
Real Estate Transfer Tax
August 5, 2004
lessee, and the lease is for substantially all of the premises constituting the property. The Sublease
and the Sub-sublease are both for terms less than 49 years and would not be taxable.
With respect to the taxable Ground Lease, section 1401(d)(i) of the Tax Law provides, in
part, that 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. Section 575.7(b)(1)
of the Regulations provides the consideration used to compute the tax would be the present value
of the right to receive rental payments or other payments attributable to the use and occupancy of
the real property, including the present value of rental or other payments attributable to any renewal
term. However, the Ground Lease provides for no rent payments to be given by Petitioner as lessee.
Consequently, based on section 1401(d)(i) of the Tax Law and section 575.7(b)(1) of the
Regulations, there would be no consideration derived from the present value of the rent payments.
As shown in the example at section 575.11(a)(8) of the Regulations, the conveyance of the
Facility by the Army to Petitioner as a contribution of assets to Petitioner is subject to tax to the
extent that there is a change in beneficial interest. The regulations do not specify how the
consideration would be determined for such a conveyance. However, section 1401(d) of the Tax
Law provides that consideration includes the price paid for real property or any interest therein,
whether paid by money, property, or any other thing of value. In this case, it is evident that the
consideration for the transfer would be derived from the value of the membership interest in
Petitioner received by the Army. The consideration for the Facility would be a component of the
total value of such membership interest, and may be measured by the fair market value of the real
property or interest therein apportioned based upon the percentage change in beneficial interest.

DATED: August 5, 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.