Cadman Towers, a Mitchell-Lama not-for-profit housing cooperative with 421 apartments and 16,000 shares, plans to voluntarily dissolve and reconstitute as a new for-profit BCL corporation (Cadman Towers Owners) with 101,038 shares, letting shareholders finally sell at market value instead of at restricted Mitchell-Lama prices. Each old share converts to a different number of new shares (to satisfy an IRS 'reasonable relationship' test), and old apartment leases become proprietary leases tied to the new shares. Does this conversion trigger New York's Real Estate Transfer Tax, both on the building itself and on the new shares issued to shareholders?

Plain-English summary

Cadman Towers, Inc. was a not-for-profit residential cooperative housing corporation, organized under Article II of the Private Housing Finance Law (PHFL), operating a 421-unit apartment building in New York City (plus commercial spaces) with 16,000 issued shares, under the supervision of NYC's Department of Housing Preservation and Development (HPD) as part of the Mitchell-Lama Program. Mitchell-Lama restrictions prevented shareholders from realizing the market value of their apartment interests on sale, in exchange for favorable tax and financing benefits. Under Mitchell-Lama's voluntary-dissolution provisions (PHFL § 35), Cadman Towers drafted a Voluntary Dissolution and Reconstitution Plan: it would dissolve under the PHFL and, as sponsor of the Plan, organize a new wholly-owned subsidiary, Cadman Towers Owners Corp., under the Business Corporation Law (BCL) — with Cadman Towers then merging into Cadman Towers Owners, which would operate on a for-profit basis, free of PHFL/HPD oversight.

Cadman Towers Owners would have 101,038 shares — each existing Cadman Towers share converting into an average of 6.2482 new shares, varying by apartment from 3.8875 to 7.4848 shares, calibrated to satisfy the "reasonable relationship" test in I.R.C. § 216 (the federal tax provision governing cooperative housing corporations). Shareholders' existing apartment leases would become proprietary leases appurtenant to their new shares. The practical effect: shareholders could finally sell their shares at market prices instead of being limited to a specified list of purchasers at equity-plus-amortization pricing, and HPD's control over income-eligible waiting lists, tenant approval, and maintenance/assessment oversight would end entirely, shifting to Cadman Towers Owners.

The Department's opinion, working through the governing Tax Law provisions in detail, reached two separately taxable events. First, the conveyance of the Property from Cadman Towers to Cadman Towers Owners is a "conveyance by a sponsor to a cooperative housing corporation" under 20 NYCRR § 575.11(a)(12), with consideration equal to any cash Cadman Towers received, existing mortgages/liens/encumbrances on the property, and the fair market value of the Cadman Towers Owners shares transferred to Cadman Towers as sponsor. Although this transaction would ordinarily look like a mere change of form (the same underlying ownership community, just reorganized), the Tax Law § 1405(b)(6) exemption for mere changes of form is EXPRESSLY carved out for conveyances to a cooperative housing corporation of the real property comprising the cooperative dwellings — so this conveyance is fully taxable regardless.

Second, the ORIGINAL conveyance of the new Cadman Towers Owners shares to shareholders, issued in connection with their proprietary leaseholds, is independently taxable under 20 NYCRR § 575.8(a)(1), with consideration deemed to be the fair market value of the shares apportioned to each unit (Tax Law § 1401(d)) — but, unlike the building-level conveyance, THIS share conveyance CAN qualify for the § 1405(b)(6) mere-change exemption to the extent it doesn't represent a real change in beneficial ownership. Because the RETT statute otherwise taxes the sponsor-to-co-op conveyance regardless of any lack of beneficial ownership change, Tax Law § 1405-B(a) (paired with 20 NYCRR § 575.8(c)) provides a credit: a proportionate part of the tax already paid on the building-level conveyance to Cadman Towers Owners can offset the tax on the original share conveyance to participating shareholders, to the extent the building conveyance itself represented a mere change of form. Finally, if any individual apartment's share conveyance involves $1 million or more in consideration, the additional 1% tax under Tax Law § 1402-a(a) applies as well, again subject to the same mere-change exemption analysis.

What this means for you

A Mitchell-Lama privatization is taxed at the building level even though no traditional buyer or seller is involved

The dissolution-and-reconstitution mechanics required to exit Mitchell-Lama trigger RETT on the sponsor's conveyance of the real property to the new cooperative corporation, specifically because the mere-change-of-form exemption doesn't cover conveyances to a cooperative housing corporation — this is a real cost co-op boards need to budget for when planning privatization.

The share-conversion ratio and I.R.C. § 216 compliance don't change the RETT analysis, but the mere-change exemption can still apply to the share issuance

Even though Cadman Towers' share-conversion ratios varied by apartment to meet a federal tax test unrelated to New York RETT, the state-law question for the NEW share issuance is simply whether beneficial ownership changed — and a credit is available for whatever portion of the building-level tax already paid overlaps with that analysis.

This ruling is the doctrinal template later Mitchell-Lama privatization opinions rely on

The Department's own later ruling on a similar Mitchell-Lama conversion (TSB-A-10(2)R) applies materially the same two-conveyance-plus-credit framework established here — useful as a reference point for any co-op board evaluating a Mitchell-Lama exit.

Common questions

Q: If our Mitchell-Lama co-op reorganizes into a new for-profit corporation with the exact same shareholder community, is that RETT-free since nothing really changed?
A: No, not at the building level -- the conveyance of the real property to the new cooperative housing corporation is taxable regardless of unchanged beneficial ownership, because the mere-change-of-form exemption doesn't apply to conveyances to a cooperative housing corporation.

Q: Do shareholders themselves get exempt treatment on their new shares if their ownership percentage doesn't change?
A: Possibly -- the original conveyance of new shares to shareholders (unlike the building conveyance) CAN qualify for the mere-change-of-form exemption, and where it doesn't fully qualify, a credit for the building-level tax already paid can offset some of the liability.

Q: Does varying the share-conversion ratio by apartment (to meet an IRS rule) affect New York RETT liability?
A: Not directly -- the federal I.R.C. § 216 "reasonable relationship" test that drove Cadman Towers' apartment-specific conversion ratios is a separate federal tax law requirement; the state RETT analysis turns on New York's own conveyance, consideration, and mere-change-of-form rules.

Citations and references

Statutes and guidance:

• Section 1402(a) of Article 31 of the Tax Law
• Section 1402-a of the Tax Law
• Section 1401(d) of Article 31 of the Tax Law
• Section 1405(b) of the Tax Law
• Section 1405-B(a) of the Tax Law
• Section 575.8 of the Real Estate Transfer Tax Regulations
• Section 575.11(a) of the Real Estate Transfer Tax Regulations
• Section 35 of Article II of the New York State Private Housing Finance Law
• I.R.C. § 216

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_4r.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Taxpayer Guidance Division

TSB-A-08(4)R
Real Estate Transfer Tax
July 29, 2008

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M071219A

On December 19, 2007, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Joan Meyler, Esq., 10 Clinton Street, Dx11, Brooklyn, NY 11201.
Petitioner, Joan Meyler, Esq., provided additional information pertaining to the Petition on
March 10, 2008.
The issue raised by Petitioner is whether the transactions described below are subject to
the real estate transfer tax imposed by Article 31 of the Tax Law.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Cadman Towers, Inc. (Cadman Towers) is currently the owner of certain real property
located in New York City (the Property). Cadman Towers was organized under Article II of the
Private Housing Finance Law (PHFL) to operate the property under the supervision of the
New York City Department of Housing Preservation and Development (HPD) as a not-for-profit
residential cooperative apartment building for persons who meet HPD’s income eligibility
requirements. Cadman Towers currently has 16,000 issued and outstanding shares. There are
421 residential units and several commercial spaces in the Property.
Having been formed under the PHFL, Cadman Towers is subject to the Mitchell-Lama
Program rules and regulations that prevent shareholders of Cadman Towers from realizing the
market value of their interest in Cadman Towers upon the sale of their interest. Cadman Towers
is also provided certain advantageous tax and financing benefits.
The Mitchell-Lama Program allows withdrawal from the program through the voluntary
dissolution of the limited-profit housing company. In conjunction with a dissolution of the
limited-profit housing company, title to the property may then be conveyed to the owner of the
limited-profit housing company’s capital stock or to a corporation designated for that purpose, or
the limited-profit housing company may be reconstituted pursuant to the appropriate laws
relating to the formation and conduct of corporations.
Upon withdrawal from the Mitchell-Lama Program, the existing mortgages encumbering
the land and building are required to be satisfied. Additionally, upon withdrawal, all surplus
funds remaining in the treasury of Cadman Towers prior to the voluntary dissolution must be
surrendered to New York City.
A Voluntary Dissolution and Reconstitution Plan (the Plan) to convert Cadman Towers to
private cooperative ownership has been drafted. Under the Plan, Cadman Towers, as the sponsor

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of the Plan, will organize Cadman Towers Owners Corp. (Cadman Towers Owners) as its wholly
owned subsidiary pursuant to the New York State Business Corporation Law (BCL).
Cadman Towers will be dissolved in accordance with the provisions of the PHFL. Upon
dissolution, Cadman Towers will reconstitute itself as a BCL corporation by merging into
Cadman Towers Owners. The reconstituted corporation will be operated on a for-profit basis,
will cease to be governed by the PHFL, and will have all the powers and authority of a BCL
corporation.
Cadman Towers Owners will have 101,038 shares issued and outstanding. Each issued
share of Cadman Towers will become, on an average, 6.2482 shares of Cadman Towers Owners
varying for each apartment with a low of one share of Cadman Towers becoming 3.8875 shares
of Cadman Towers Owners and a high of one share of Cadman Towers becoming 7.4848 shares
of Cadman Towers Owners, in order to meet the “reasonable relationship” test in section 216 of
the Internal Revenue Code. In addition, Cadman Towers shareholders’ current leases for their
apartments will be exchanged for proprietary leases for their apartments appurtenant to their
shares of Cadman Towers Owners.
The dissolution of Cadman Towers and reconstitution as Cadman Towers Owners will
allow shareholders of Cadman Towers Owners to sell the shares appurtenant to their apartments
at market prices. The shareholders will no longer be limited to selling their shares only to a
specified list of purchasers for equity paid plus amortization.
Control of the corporation while it is a PHFL corporation is exercised under the
supervision and direction of HPD. When Cadman Towers reconstitutes to become Cadman
Towers Owners organized under the BCL, the control exercised by HPD will cease, waiting lists
of income-eligible applicants will be eliminated, HPD supervision of who can live in the
building and of maintenance charges and assessments will end, and complete control over these
matters will be transferred to Cadman Towers Owners.
Applicable law and regulations
Section 1402(a) of Article 31 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 1402-a of the Tax Law provides, in part:
(a) In addition to the tax imposed by section fourteen hundred two of this
article, a tax is hereby imposed on each conveyance of residential real property or

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interest therein when the consideration for the entire conveyance is one million
dollars or more. For purposes of this section, residential real property shall
include any premises that is or may be used in whole or in part as a personal
residence, and shall include a one, two, or three-family house, an individual
condominium unit, or a cooperative apartment unit. The rate of such tax shall be
one percent of the consideration or part thereof attributable to the residential real
property. . . .
*

*

*

(c) Except as otherwise provided in this section, all the provisions of this
article relating to or applicable to the administration, collection, determination and
distribution of the tax imposed by section fourteen hundred two of this article
shall apply to the tax imposed under the authority of this section with such
modifications as may be necessary to adapt such language to the tax so
authorized. Such provisions shall apply with the same force and effect as if those
provisions had been set forth in this section except to the extent that any provision
is either inconsistent with a provision of this section or not relevant to the tax
authorized by this section.
Section 1401(d) of Article 31 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.
*

*

*

(v) In the case of (i) the original conveyance of shares of stock in a
cooperative housing corporation in connection with the grant or transfer of a
proprietary leasehold by the cooperative corporation or cooperative plan sponsor
and . . . consideration shall include a proportionate share of the unpaid principal
of any mortgage on the real property of the cooperative housing corporation
comprising the cooperative dwelling or dwellings. Such share shall be
determined by multiplying the total unpaid principal of the mortgage by a
fraction, the numerator of which shall be the number of shares of stock being
conveyed in the cooperative housing corporation in connection with the grant or

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transfer of a proprietary leasehold and the denominator of which shall be the total
number of shares of stock in the cooperative housing corporation.
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 1405-B(a) of the Tax Law provides, in part:
   Notwithstanding the definition of “controlling interest” contained in
   subdivision (b) of section fourteen hundred one of this article or anything to the
   contrary contained in subdivision (e) of section fourteen hundred one of this
   article, the tax imposed by this article shall apply to (1) the original conveyance of
   shares of stock in a cooperative housing corporation in connection with the grant
   or transfer of a proprietary leasehold by the cooperative corporation or
   cooperative plan sponsor, and (2) the subsequent conveyance of such stock in a
   cooperative housing corporation in connection with the grant or transfer of a
   proprietary leasehold by the owner thereof. . . . In determining the tax on a
   conveyance described in paragraph one of this subdivision, a credit shall be
   allowed for a proportionate part of the amount of any tax paid upon the
   conveyance to the cooperative housing corporation of the real property
   comprising the cooperative dwelling or dwellings to the extent that such
   conveyance effectuated a mere change of identity or form of ownership of such
   property and not a change in the beneficial ownership of such property. The
   amount of the credit shall be determined by multiplying the amount of tax paid
   upon the conveyance to the cooperative housing corporation by a percentage
   representing the extent to which such conveyance effectuated a mere change of
   identity or form of ownership and not a change in the beneficial ownership of
   such property, and then multiplying the resulting product by a fraction, the
   numerator of which shall be the number of shares of stock conveyed in a
   transaction described in paragraph one of this subdivision and the denominator of
   which shall be the total number of shares of stock of the cooperative housing
   corporation (including any stock held by the corporation). In no event, however,
   shall such credit reduce the tax, on a conveyance described in paragraph one of
   this subdivision, below zero, nor shall any such credit be allowed for a tax paid
   more than twenty-four months prior to the date on which occurs the first in a

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series of conveyances of shares of stock in an offering of cooperative housing
corporation shares described in paragraph one of this subdivision.
Section 575.8 of the Real Estate Transfer Tax Regulations provides, in part:
(a) Notwithstanding the definition of controlling interest contained in
section 575.1(b) of this Part or anything to the contrary contained in section
575.1(e)(1) of this Part, the real estate transfer tax applies to:
(1) the original conveyance of shares of stock in a cooperative housing
corporation in connection with the grant or transfer of a proprietary
leasehold by the cooperative housing corporation or cooperative plan
sponsor; and
(2) the subsequent conveyance of such stock in a cooperative housing
corporation in connection with the grant or transfer of a proprietary
leasehold by the owner thereof.
*

*

*

(c) Credit for tax previously paid.
(1) In the case of conveyances described in paragraph (a)(1) of this
section, a credit shall be allowed for a proportionate part of the amount of any tax
paid upon the conveyance to the cooperative housing corporation of the real
property comprising the cooperative dwelling or dwellings to the extent that such
conveyance effectuated a mere change of identity of form of ownership of such
property and not a change in the beneficial ownership of such property.
(2) The amount of the credit is determined by multiplying the amount of
tax paid upon the conveyance to the cooperative housing corporation by a
percentage representing the extent to which such conveyance effectuated a mere
change of identity or form of ownership and not a change in the beneficial
ownership of such property, and then multiplying the result by a fraction, the
numerator of which is the number of shares of stock conveyed in a transaction
described in paragraph (a)(1) of this section and the denominator of which is the
total number of shares of stock of the cooperative housing corporation (including
any stock held by the corporation).
(3) The credit will not reduce the tax below zero. The credit will not be
allowed for a tax paid more than 24 months prior to the date on which occurs the
first in a series of conveyances of shares of stock in an offering of cooperative
housing corporation shares as described in paragraph (a)(1) of this section.

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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.
*

*

*

(12) A conveyance by a sponsor to a cooperative housing corporation is subject to
tax. (Consideration in such case includes the amount of cash received by the sponsor, the
amount of any mortgages, liens or encumbrances on the real property and the fair market
value of the shares in the cooperative housing corporation which are transferred to the
sponsor.)
Section 35 of Article II of the New York State Private Housing Finance Law provides, in
part:
Voluntary dissolution. 1. A company aided by a loan made prior to May first,
nineteen hundred fifty-nine, may voluntarily be dissolved, with the consent of the
commissioner or of the supervising agency, as the case may be, not less than thirty-five
years after the occupancy date upon the payment in full of the remaining balance of
principal and interest due and unpaid upon the mortgage held by the state or a
municipality pursuant to this article and payment to the municipality of a sum equal to
the total of all accrued taxes for which tax exemption was granted and received pursuant
to section thirty-three of this article, provided however that such payment of accrued
taxes shall be waived if a company is voluntarily dissolved subsequent to the original
maturity date of any mortgage held by the state or a municipality pursuant to this article.
*

*

*

3. Upon such dissolution, title to the project may be conveyed in fee to the owner
   or owners of its capital stock or to any corporation designated by it or them for the
   purpose, or the company may be reconstituted pursuant to appropriate laws relating to the
   formation and conduct of corporations, provided, however, that prior to any such
   dissolution and conveyance or reconstitution, payment shall be made of all current
   operating expenses, taxes, indebtedness and all accrued interest thereon and the par value
   of and accrued dividends on the outstanding stock of such company. If after making such
   payments, and after conveyance of the project, a surplus remains in the treasury of the
   company, such surplus, except in the case of a project aided by a state loan made after
   May first, nineteen hundred fifty-nine, shall upon dissolution, be paid into the general
   fund of the municipality which granted tax exemption. After such dissolution and
   conveyance, or such reconstitution, the provisions of this article shall become and be
   inapplicable to any such project and its owner or owners and any tax exemption granted

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with respect to such project pursuant to section thirty-three hereof shall cease and
terminate.
Opinion
The conveyance of the Property from Cadman Towers to Cadman Towers
Owners is a conveyance by a sponsor to a cooperative housing corporation of real
property comprising a cooperative dwelling or dwellings subject to the real estate transfer
tax. The consideration subject to tax on the conveyance will be the amount of cash
received by Cadman Towers; the amount of any mortgages, liens or encumbrances on the
real property; and the fair market value of the shares in the cooperative housing
corporation (Cadman Towers Owners) that are transferred to Cadman Towers as sponsor.
See section 575.11(a)(12) of the Real Estate Transfer Tax Regulations. In general, the
transaction described above would be deemed to constitute a mere change of identity or
form of ownership or organization. However, the exemption provided under section
1405(b)(6) of the Tax Law for conveyances that effectuate a mere change of identity or
form of ownership or organization does not apply to conveyances to a cooperative
housing corporation of real property comprising the cooperative dwellings.
The original conveyance of shares in Cadman Towers Owners in connection with
the grant or transfer of proprietary leaseholds will be subject to real estate transfer tax.
See section 575.8(a)(1) of the Real Estate Transfer Tax Regulations. Consideration for
each original conveyance of shares of stock by Cadman Towers Owners is deemed to be
the fair market value of the shares apportioned to each unit. See section 1401(d) of the
Tax Law. However, to the extent that the conveyance of the shares in the private
cooperative to the participating shareholders of the limited-profit housing company
effects a mere change in the identity or form of ownership or organization where there is
no change in beneficial ownership, the mere change exemption under section 1405(b)(6)
of the Tax Law may apply.
As previously noted, the real estate transfer tax applies to transfers by a sponsor to
a cooperative housing corporation of the property comprising the cooperative dwellings
notwithstanding that there may have been no change in beneficial ownership. Pursuant to
section 1405-B(a) of the Tax Law and section 575.8(c) of the Real Estate Transfer Tax
Regulations, a credit is allowed for a proportionate part of the amount of any tax paid
upon the conveyance of the property by the sponsor to the cooperative housing
corporation against the tax imposed on the original conveyance of stock shares in the
cooperative housing corporation in connection with the grant or transfer of a proprietary
lease. Thus, to the extent the mere change rule is not otherwise applicable, any real estate
transfer tax on the conveyance of shares in the BCL private cooperative housing
corporation to the participating shareholders may be offset by a credit for a proportionate
part of the amount of any real estate transfer tax paid upon the conveyance by Cadman

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Towers to Cadman Towers Owners of the interest in the real property comprising the
cooperative dwellings.
It should be noted that, pursuant to section 1402-a(a) of the Tax Law, if the
consideration for the conveyance of shares related to an individual cooperative apartment
unit is for $1 million or more, the conveyance will be subject to an additional 1% tax at
the time of conveyance. However, as stated above, the mere change exemption may
apply if the conveyance effectuates a mere change of identity or form of ownership or
organization.

DATED: July 29, 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.