An LLC acquired a shopping-center site as a nominee/agent for its two members, who are each solely responsible for developing and funding their own separate future condominium unit. Once construction and the condominium declaration are complete, the LLC will distribute each member's designated unit to that member. Is this distribution exempt from New York's Real Estate Transfer Tax as a mere change of form, since each member always had the sole economic interest in its own unit?

Plain-English summary

An LLC (the "Company") acquired title to a shopping-center development site in New York City, acting purely as a nominee/agent for its two corporate members. The members funded the acquisition entirely with their own money (with one member reimbursing the other for its share upon later liquidation of the Company), and each member's interest was strictly limited to its own future condominium unit and a share of the common elements — neither had any interest in the other's unit or in the property as a whole. The site would be developed into a shopping center with a developer demolishing the existing industrial building and constructing two condominium units under a Condominium Declaration: one unit (a ~165,000-square-foot flagship retail store) for Member 2, and the other (~120,000 square feet of retail/storage space across multiple buildings, to be leased to various tenants) for Member 1. Each member was independently responsible for developing and building out its own unit, and all tax attributes and benefits/obligations tied to a unit belonged solely to that member. The Company itself was designed to exist only briefly — under three years — just long enough to complete the core-and-shell construction and the condominium conversion process. Once the condominium documents were recorded, the Company would distribute each member's designated unit (plus its common-elements share) to that member, with Member 1 paying Member 2 a "repayment amount" at that closing.

The Department held the distribution is exempt from New York's Real Estate Transfer Tax (RETT) under Tax Law § 1405(b)(6), which exempts conveyances that merely change the identity or form of ownership without changing beneficial ownership. It walked through five of its own prior rulings applying the same principle: TSB-A-94(6)R (converting a homeowners association's individually-occupied lots/homes into condominium units, where each homeowner's beneficial interest in their own lot never changed); TSB-A-07(4)R (a condominium re-conveyed back to its original owner from a Cultural Resources Trust after a four-year property-tax-benefit arrangement, where the owner remained the beneficial owner throughout); and TSB-A-01(3)R, TSB-A-99(3)R, and TSB-A-01(8)R (each an LLC where members held a beneficial interest solely in their own designated unit, with conversion to condominium form followed by distribution of legal title to each member's own unit). In each case, because beneficial ownership of each specific unit had continuously vested with a single party throughout the process, the eventual conveyance of legal title was found to be a mere change of form, not a real transfer of beneficial ownership. Applying that same reasoning here — each member funded, developed, and held sole beneficial ownership of its own designated unit from the outset, with the nominee Company only holding bare legal title as agent — the Department concluded the Company's distribution of the condominium units to its members is exempt from RETT.

What this means for you

A nominee/agent LLC holding title for members with separately-owned, separately-funded units supports RETT-exempt distribution

If your development entity holds only bare legal title as a nominee or agent, while each member independently funds, develops, and bears all benefits and burdens of its own specific unit from the project's inception, the eventual distribution of condominium (or other) legal title to each member can qualify as a tax-free "mere change of form" under Tax Law § 1405(b)(6).

This is a well-established, repeatedly-applied doctrine -- structure your deal to match the pattern

This ruling is the sixth in a consistent line of Department opinions (TSB-A-94(6)R, TSB-A-07(4)R, TSB-A-01(3)R, TSB-A-99(3)R, TSB-A-01(8)R, and this one) reaching the same result on similar facts. Developers structuring a multi-party condominium project can look to this settled pattern -- separate capital funding, no cross-interests between members' units, and legal title held only by a nominee -- as a reliable template for RETT-exempt treatment.

A "repayment amount" between members at the distribution closing didn't change the outcome

Even though Member 1 paid Member 2 a repayment amount when receiving its unit (reflecting Member 2's earlier funding of costs attributable to Member 1), this reimbursement between the members themselves didn't convert the Company-to-member distribution into a taxable sale -- the analysis focused on whether beneficial ownership shifted, not on ancillary payments between the ultimate owners.

Common questions

Q: Does using a nominee LLC to hold title during construction, instead of each member holding direct title, put the eventual distribution at risk of RETT?
A: Not if each member's beneficial ownership of its own specific unit is fixed and documented from the start (separate funding, no cross-interests) -- the Department treats the LLC as functioning like an agent, and the final title conveyance as a mere change of form.

Q: Do the members need to have identical or proportional interests for this exemption to apply?
A: No -- here the two units differed substantially in size and use (a single 165,000-sq-ft flagship store versus ~120,000 sq ft of multi-tenant retail/storage). What matters is that each member's own beneficial interest, whatever its shape, stayed constant throughout.

Q: Is this exemption a one-off, or is it well-established for similar transactions?
A: It's well-established -- this ruling expressly follows and cites five prior Department advisory opinions reaching the same conclusion on comparable facts (TSB-A-94(6)R, TSB-A-07(4)R, TSB-A-01(3)R, TSB-A-99(3)R, TSB-A-01(8)R).

Citations and references

Statutes and guidance:

• Tax Law § 1402(a)
• Tax Law § 1405(b)(6)
• TSB-A-94(6)R
• TSB-A-07(4)R
• TSB-A-01(3)R
• TSB-A-99(3)R
• TSB-A-01(8)R

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_2012.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a12_1r.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-12(1)R
Real Estate Transfer Tax
March 6, 2012

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M111020C

The Department of Taxation and Finance received a Petition for Advisory Opinion from name
and address redacted. Petitioner asks whether the distribution of condominium units by the Company
to its members will be exempt from the real estate transfer tax (“RETT”) imposed pursuant to Article
31 of the Tax Law. We conclude that the distribution is exempt from RETT.
Facts
Petitioner, acting as the agent for Petitioner’s members, Member 1 (Member 1) a New York
limited liability corporation, and Member 2 (Member 2), a corporation acquired title to a parcel of real
property (“the Site”). The parties intend to have Member 2 enter into a site development agreement
with developer (developer), a New York limited liability company as developer. This agreement will
set forth the commercial development plan for the Site.
Petitioner is developing a shopping center (the "Project") on the Property. Pursuant to the plans
to develop the Project, the members plan to have the developer demolish the industrial building on the
Site and construct the shopping center. When constructed, the Project is intended to consist of two
condominium units (the "Units"), each including undivided interests in the appurtenant common
elements identified in the declaration of condominium. It is further intended that the declaration of
condominium be finalized at or prior to substantial completion of the improvements for the Project (the
"Condominium Declaration"). One Unit will be owned by Member 2 and one Unit will be owned by
Member 1. The Units will vary in form and function. Member 2 is intended to be a single 165,000
square foot brand retail store, and Member 1 is intended to be approximately 120,000 square feet of
retail space and storage, in the aggregate, in more than one building that Member 1 intends to lease to
various tenants, consistent with an overall shopping center development.
Sections 1.5 and 5.1 of the Operating Agreement provide that Petitioner acquired title to the
Property as a nominee on behalf of Member 1 and Member 2. Member 1 and Member 2 funded the
acquisition with their own funds, with Member 1 reimbursing Member 2 for Member 1’s costs
attributable to Member 1 upon distribution in liquidation by the Petitioner of Member 1. The interest
of each member in the Site is limited to its interest in its respective condominium unit or units as well
as the common areas of the condominium regime. Neither has an interest in the other's unit, nor does
either have any co-ownership interests in the property as a whole. All benefits and obligations
regarding a particular member's unit will be attributable to that member, and all tax attributes
attributable to a member's unit or units will be allocated to that member. Member 2 and Member 1 are
responsible for the development and all related services of building out their respective units (other
than that which is considered part of common elements in the condominium regime). The Petitioner is
designed to last for a limited period of time, just long enough to complete the construction (the core
and shell) and condominium process, which is presently estimated to be less than three years.

-2-

TSB-A-12(1)R
Real Estate Transfer Tax
March 6, 2012

The parties intend to have the Petitioner convert its ownership in the Site to a condominium
form of ownership pursuant to Article 9-B of the Real Property Law by entering into a commercial
condominium declaration and by-laws and having the condominium documents recorded in the Office
of the Register of the City of New York.
Upon substantial completion of construction of certain improvements on the Site and recording
of the condominium documents, subject to and pursuant to the terms and conditions of the Site
Development Agreement, the parties intend to have the Petitioner convey or distribute to Member 1,
that certain condominium unit designated in the Site Development Agreement as created for Member 1
and an undivided percentage interest in the “common elements” of the condominium. The parties also
intend to have the Petitioner convey or distribute to Member 2 that certain condominium unit
designated in the Site Development Agreement as created for Member 2, together with an undivided
percentage interest in the common elements of the condominium. At the closing of the conveyance or
distribution of Member 1’s condominium unit to Member 1, Member 1 shall pay to Member 2 a
repayment amount. Such closing is referred to in the parties’ operating agreement as the
“Distribution.”
Analysis
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. However, section 1405 (b)(6) of the Tax Law provides
an exemption from the real estate transfer tax for conveyances that effectuate a mere change of identity
or form of ownership or organization where there is no change in beneficial ownership.
We have previously provided advice concerning the scope of the section 1405(b)(6) RETT
exemption. In TSB-A-94(6)R, where each participant in the conversion of a homeowners association
into condominium units held a beneficial interest solely in the lot and home he or she occupied as his
or her residence and held no interest in the other homeowner’s lots or homes, it was recognized that the
beneficial ownership of each lot and home had continuously vested with each individual homeowner,
without regard to the homeowner being a member of a homeowners association. Thus, the conversion
of the lots and homes within a homeowners association into condominium units and the resulting
exchange by the homeowners of their lot deeds for condominium deeds constituted a mere change of
identity or form of ownership or organization, since there was no change in the beneficial ownership of
each lot and home.
In TSB-A-07(4)R, the owner of a condominium unit transferred the property to the Trust for
Cultural Resources (“the Trust”) for a four year period to obtain certain property tax and other benefits
under the New York State Cultural Resources Act. At the end of the term, the condominium was to be
re-conveyed back to the original owners. The owner remained responsible for all obligations incurred
prior to transfer to the Trust, including financing and leasing of the property. The cost of maintaining
the condominium was to be borne by the original owner, and it was to remain as beneficial owner for
federal, state and local income tax purposes. We advised that based on the facts, the conveyance from
the Trust back to the owner is exempt from the RETT as a conveyance that constitutes a mere change
of identity or form of ownership," within the meaning of section 1405(b)(6) of the Tax Law.

-3-

TSB-A-12(1)R
Real Estate Transfer Tax
March 6, 2012

In TSB-A-01(3)R, each member, pursuant to an LLC operating agreement, held a beneficial
interest in its own unit and held no interest in the units of the other members. Under the proposed plan,
upon completion of the project, the petitioner was to convert the property to a condominium form of
ownership and would then convey each of the units to its respective owner. We recognized that the
beneficial ownership of the respective units continuously vested with such unit's respective unit owner,
without regard to the owners being members of the petitioner. Thus the conversion of the property by
the petitioner into condominium units and the resulting conveyance of legal title to the respective units
to their respective members would not effectuate a change in the beneficial ownership interest as held
by the members prior to the conversion.
In TSB-A-99(3)R, and in TSB-A-01(8)R, where each member of an LLC held a beneficial
interest in its own unit of the real property and held no interest in the units of the other members, we
recognized that the beneficial ownership of each unit had continuously vested with each unit owner.
Thus, the conversion of the units within the LLC into condominium units and the resulting conveyance
to each unit owner of its respective unit constituted a mere change of identity or form of ownership or
organization, because there was no change in the beneficial ownership of each unit.
Thus, consistent with the rationale set forth in the above referenced five Advisory Opinions, we
conclude that the distribution of the Site by the Company into condominium units and the resulting
conveyances of legal title of the units to the respective members will constitute a mere change of
identity or form of ownership or organization, and such conveyances will be exempt from the real
estate transfer tax.

DATED: March 6, 2012

NOTE:

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

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. The information provided in this document does not cover every situation
and is not intended to replace the law or change its meaning.