My bank offers a specialized real estate financing product: the seller deeds the property directly to us (not the client), we lease the property back to the client at payments equivalent to mortgage principal and interest, and we deed the property to the client once the loan is paid off. Is real estate transfer tax due only once -- on the seller-to-bank deed -- or does it also apply to the lease and to our later deed back to the client at the end of the financing term?

Plain-English summary

A UK bank operating a New York federal branch (until 2000) offered a specialized real estate financing product to certain clients. A client would contract to buy property from a seller and make a down payment, then engage the bank to finance the remaining purchase price. At the client's request, the bank would pay the seller directly, the seller would execute a deed to the BANK (not the client), the bank would lease the property to the client, and the client would separately agree to purchase the property for the remaining principal by the end of the lease term. The monthly lease payment was structured to equal a conventional mortgage's principal-and-interest payment, and the client could prepay and terminate the lease at any time. A recorded Memorandum of Lease and Memorandum of Agreement to Purchase both stated they were intended to operate as a mortgage under Real Property Law § 320, and mortgage recording tax was paid on them; RETT and NYC Real Property Transfer Tax were paid when the seller's deed to the bank was recorded. After closing, the client took sole possession, handled repairs and maintenance, and funded property taxes through an escrow account the bank provided — while the bank held the traditional rights and remedies of a mortgagee if the client defaulted. At the end of the lease (or full repayment, whichever came first), the bank executed a deed conveying the property to the client.

Federal bank regulators had already blessed this arrangement in substance: the Comptroller of the Currency's Interpretive Letter #806 confirmed the bank's branch would never actually hold, operate, or take possession of the property (except upon default or lease termination, in which case it would be treated as "Other Real Estate Owned" bank property) — despite the "cosmetic appearance" of the bank holding real estate, the substance was an arms-length mortgagor-mortgagee relationship.

The Department analyzed the transaction under Regulation § 575.11(a)(13), which addresses an analogous scenario: a conveyance by a third party to an industrial development agency (IDA), at the direction of the IDA financing's true beneficiary, followed by the IDA leasing the property back to that beneficiary — treated as a conveyance from the third party (grantor) directly to the beneficiary (grantee) for RETT purposes. Applying the same logic here, the seller is considered to convey the property to the bank's CLIENT (the true financing beneficiary), even though the deed nominally runs to the bank — so RETT was due and properly paid once, on that initial seller-to-bank conveyance. The Department then held that neither the creation of the lease, nor the bank's eventual deed of fee title back to the client, is separately taxable: Tax Law § 1401(e) excludes a conveyance in satisfaction of a mortgage from the definition of a taxable "conveyance," and § 1405(b)(2) exempts conveyances used to secure a debt. Because the client never intended to relinquish control of the property and retained all the practical benefits and responsibilities of ownership throughout, and the bank's final deed simply represented satisfaction of the security instrument once the debt was repaid, the whole sequence — seller-to-bank deed, lease creation, bank-to-client deed — is treated as a single transaction in furtherance of financing the client's acquisition, citing the Department's own prior rulings (TSB-A-02(4)R, HSBC Mortgage Corporation; TSB-A-06(3.1)R, 360 Brooklyn Investors) and Matter of Atlantic Cement Company, Inc. v. Murphy.

What this means for you

A "deed-in-lieu-of-mortgage" bank financing structure is taxed once, not three times

If a lender's specialized financing product routes title through the lender itself (rather than a conventional mortgage), as long as the client/borrower retains real control and the practical burdens of ownership throughout, RETT applies only to the initial deed into the lender's name -- the lease and the final payoff deed back to the borrower are not separately taxable.

Federal regulatory characterization of the arrangement as "mortgage-equivalent" supported (but wasn't solely determinative of) the state tax result

The Department noted the OCC's regulatory letter confirming the bank never truly held or operated the property, but grounded its own conclusion independently in the New York statutory scheme (the mortgage-satisfaction exclusion and the debt-security exemption) -- so structuring a deal to satisfy federal banking regulators alone wouldn't guarantee this state tax result without also matching these New York-specific facts.

This is the doctrinal origin later Islamic-finance and similar deed-as-security rulings build on

This 2008 opinion is the Department's own cited precedent for its later ruling on an Islamic-finance (Ijara) deed-as-security structure (TSB-A-10(3)R) -- the same "single financing transaction, taxed once" framework applies regardless of the particular religious or contractual label used for the financing product.

Common questions

Q: If a lender holds legal title to property as security for a loan (instead of a traditional mortgage), does the borrower's eventual deed back trigger a second round of RETT?
A: No -- as long as the borrower retained real control and the practical burdens/benefits of ownership throughout, the lender's later deed back to the borrower represents satisfaction of the security instrument and isn't separately taxable.

Q: Does the lease created as part of this kind of financing arrangement get taxed as its own conveyance?
A: No -- when the lease is created solely to effect and secure the lender's financing (with payments structured like mortgage principal and interest), it isn't treated as a separate taxable conveyance.

Q: Who actually pays RETT in this kind of arrangement -- the client/borrower, or the lender who technically holds the deed?
A: RETT is due once, on the conveyance from the seller -- and because the lender's client is treated as the real beneficiary of that conveyance (similar to an IDA-financing beneficiary), the tax attaches to that initial transfer regardless of which name is on the deed.

Citations and references

Statutes, guidance, and case law:

• Section 1402(a) of Article 31 of the Tax Law
• Section 1401(e) of Article 31 of the Tax Law
• Section 1401(f) of Article 31 of the Tax Law
• Section 1405(b) of the Tax Law
• Section 575.11(a) of the Real Estate Transfer Tax Regulations
• TSB-A-02(4)R (HSBC Mortgage Corporation (USA), July 26, 2002)
• TSB-A-06(3.1)R (360 Brooklyn Investors, LLC, April 30, 2007)
• Matter of Atlantic Cement Company, Inc. v. Murphy, 30 A.D.2d 456 (1968), aff'd 28 N.Y.2d 502 (1971)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_2008.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a08_2r.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Taxpayer Guidance Division

TSB-A-08(2)R
Real Estate Transfer Tax
April 28, 2008

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M071001A

On October 1, 2007, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Ahli United Bank (UK) PLC, F/K/A United Bank of Kuwait PLC, 35
Portman Square, London W1H 6LR, United Kingdom.
The issue raised by Petitioner, Ahli United Bank (UK) PLC, is whether real estate
transfer tax is imposed on the transfer of a deed by Petitioner to its client in the arrangement
described below.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner operated a federal branch in New York County until 2000. Petitioner offered
specialized financing for the purchase of real property to meet the needs of certain clients. A
client enters into a contract of sale with the seller of real property and makes a down payment.
The client engages Petitioner to finance the remainder of the purchase price. At the request of
the client, Petitioner pays the seller, the seller executes a deed to Petitioner, Petitioner leases the
property to the client, and the client enters into an agreement with Petitioner to purchase the
property for the remaining principal by the end of the lease term. The monthly lease payment is
equivalent to a principal and interest payment in a conventional mortgage loan. The client can
prepay the principal at any time and terminate the lease. The agreement to purchase states that it
is intended to operate as a mortgage in the state of New York and have the same effect as a
mortgage instrument pursuant to Real Property Law § 320.
A Memorandum of Lease (Lease) and a Memorandum of Agreement to Purchase both
providing that they are intended to operate as a mortgage, are recorded with the County Register,
and mortgage recording tax is paid. All of the required recording fees and the appropriate
amounts of New York State Real Estate Transfer Tax and New York City Real Property Transfer
Tax are paid upon recording the deed from the seller to Petitioner. After these documents are
executed at a closing, the client takes sole possession of the property. The client is required to
repair and maintain the property under the Lease. The client also funds tax payments through an
escrow account provided by Petitioner. Petitioner has the traditional rights and obligations of a
mortgagee. If the client fails to pay rent, remedies under the Lease or Agreement to Purchase are
the traditional remedies under a mortgage securing home financing. At the end of the Lease or
when the principal is repaid, whichever occurs first, Petitioner executes a deed to the client.
Petitioner requested regulatory approval from the Office of the Comptroller of the
Currency, a bureau of the U.S. Department of the Treasury, in regard to the specialized financing
arrangement described above. In response to Petitioner’s request, Interpretive Letter #806 was
issued by District Counsel for the Comptroller of the Currency. Letter #806 advised Petitioner
that these transactions could be offered at Petitioner’s federal branch, providing in part:

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TSB-A-08(2)R
Real Estate Transfer Tax
April 28, 2008

The Branch does not, and will not, actually hold real estate. It will not operate the
property, pay taxes, insurance and other charges, maintain upkeep of the premises, make
repairs when necessary, assume liability for injuries or other accidents on the property, or
otherwise exercise dominion and control over the property. The Lessee, and not the
Branch, will bear these responsibilities. Although the Branch will have legal title to the
property, it will not take actual possession of the property at any point during the lease
term. The Branch will only take possession of the property if the Lessee defaults or upon
termination of the lease. If the Branch does take possession of the property, it will take
the property as [Other Real Estate Owned] within the meaning of 12 U.S.C. § 29. Thus,
despite the cosmetic appearance of the Branch holding real estate, the substance of the
transaction shows that the Branch and the Lessee will have an arms-length, mortgagor­
mortgagee relationship.
Applicable law and regulations
Section 1402(a) of Article 31 of the Tax Law imposes a 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(e) of Article 31 of the Tax Law provides:
“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 Article 31 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

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TSB-A-08(2)R
Real Estate Transfer Tax
April 28, 2008

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:
*

*

*

2. Conveyances which are or were used to secure a debt or other
   obligation;
   Section 575.11(a) of the Real Estate Transfer Tax Regulations provides, in
   part:
   The following are examples of conveyances which are subject to the real
   estate transfer tax.
   *

*

*

(13) A conveyance of real property to an industrial development agency
(IDA) by a person who is not the beneficiary of the IDA financing, at the
direction of such beneficiary, with such beneficiary subsequently leasing the
property from the IDA, is subject to tax. In such a conveyance, the beneficiary of
the IDA financing and not the IDA is deemed to be the grantee,. . .
Opinion
Petitioner offers specialized financing for the purchase of real property. Section
575.11(a)(13) of the Real Estate Transfer Tax Regulations provides that a conveyance by
a third party to an IDA, at the direction of the beneficiary of the IDA financing, where the
property is subsequently leased by the IDA to such beneficiary, is subject to real estate
transfer tax as a conveyance from the third party, as grantor, to such beneficiary, as
grantee. The circumstances described in the present case are analogous to those
described in section 575.11(a)(13). Petitioner, as discussed below, is providing financing
to a client. The seller, at the direction of the client, conveys the real property to
Petitioner, who subsequently leases the property to the client. In the present case,
therefore, the seller is considered to convey the real property to Petitioner’s client for
purposes of the real estate transfer tax. The real estate transfer tax was due and paid when
the deed to the property was conveyed to Petitioner.

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TSB-A-08(2)R
Real Estate Transfer Tax
April 28, 2008

Pursuant to section 1401(e) of the Tax Law a transaction in satisfaction of a
mortgage is not a conveyance for purposes of the real estate transfer tax imposed by
section 1402(a) of the Tax Law. Further, pursuant to section 1405(b)(2) of the Tax Law,
conveyances that are or were used to secure a debt are exempt from the real estate
transfer tax. The agreements between Petitioner, the client, and the seller make it clear
that when the client directed the seller to deed the property to Petitioner, the client did not
intend to relinquish its control of the property and would continue to enjoy the benefits
and responsibilities of ownership. The monthly lease payment by the client to Petitioner
is equivalent to a principal and interest payment in a conventional mortgage loan. At the
end of the lease or when the principal is repaid, whichever occurs first, Petitioner
executes a deed to the client. In such case the conveyance of the fee interest at the end of
the lease by Petitioner to the client represents the satisfaction of the instrument securing
the debt or obligation. The conveyance of fee title by the seller to Petitioner pursuant to
the client’s purchase contract, the creation of the lease, and the conveyance of fee title by
Petitioner to the client upon expiration or termination of the lease is a single transaction
in furtherance of the purpose of financing the conveyance of the property from the seller
to Petitioner’s client. The real estate transfer tax due was paid on the conveyance by the
seller to Petitioner. However, there is no real estate transfer tax due on the creation of
the lease and the conveyance of the fee title by Petitioner to the client upon expiration or
termination of the lease as these transactions are entered into solely to effect and secure
Petitioner’s financing of the client’s acquisition of the real property. See sections 1401(e)
and 1405(b)(2) of the Tax Law; HSBC Mortgage Corporation (USA), Adv Op T&F,
July 26, 2002, TSB-A-02(4)R; 360 Brooklyn Investors, LLC, Adv Op T&F, April 30,
2007, TSB-A-06(3.1)R; Matter of Atlantic Cement Company, Inc. v Murphy, 30 AD2d
456 (1968), affd 28 NY2d 502 (1971).

DATED: April 28, 2008

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Taxpayer Guidance Division

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the
person or entity fully and accurately describes all relevant facts. An
Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion.