My co-owner and I hold a Manhattan property as tenants in common (I own 12.32%, my co-owner owns 87.68%). We're building a condominium there: I'm paying my share of construction costs for the ground-floor commercial unit, then we'll swap -- I'll give up my TIC interest in the whole property and take sole ownership of the commercial condo unit instead, while my co-owner keeps the residential units. Is any of this -- the cost reimbursement, or the final swap of interests -- subject to New York's Real Estate Transfer Tax?

Plain-English summary

Two parties owned a Manhattan property as tenants in common (TIC): "Owners" held a 12.32% undivided interest, and "Developer" held the remaining 87.68% (transfer taxes on that original 2006 conveyance were already paid). They entered into a TIC and Retail Unit Construction and Exchange Agreement under which Developer would build a new structure on the property — a ground-floor "Commercial Space" corresponding to Owners' 12.32% interest, and residential units above corresponding to Developer's interest. Owners had to reimburse Developer for their proportional share of the Commercial Space's design and construction costs, while Developer bore the costs of the residential portion. During construction, Owners had no control over anything except the Commercial Space, and vice versa for Developer and the residential units. The completed building was to be converted into a condominium under Article 9-B of the Real Property Law, with the Commercial Space as one unit and the residential floors as separate units (a Declaration of Condominium was ultimately recorded in July 2012). Once Owners paid their share of construction costs, Owners would convey their 12.32% TIC interest in the whole property to Developer, and Developer would convey the Commercial Space condominium unit (in fee) to Owners — ending with Owners owning the commercial unit outright and Developer owning all the residential units, with each retaining a proportional share of common areas.

Petitioners asked whether transfer taxes applied to (1) Owners' $4.275 million cost-reimbursement payment to Developer, (2) Owners' conveyance of their 12.32% TIC interest to Developer, and (3) Developer's conveyance of the Commercial Space unit to Owners.

The Department held none of this triggers RETT. On the cost reimbursement: a payment for construction costs isn't consideration for a conveyance of an interest in real property at all — it's simply not the kind of transaction Tax Law §1402(a) taxes, so no analysis of exemptions is even needed. On the two conveyances (severing the tenancy in common and transferring the commercial unit): these ARE conveyances of real property interests under Tax Law §1402(a)/§1401(e) — but Tax Law §1405(b)(6) exempts conveyances that merely change the identity or form of ownership without changing beneficial ownership. Because Developer's contractual rights under the TIC Agreement already limited it to the residential units' economics (no ability to profit from the Commercial Space) and limited Owners to the Commercial Space's economics (no ability to profit from the residential units), each party ended up owning, in fee, exactly the beneficial interest it already effectively held throughout construction. The Department concluded the parties were "in exactly the same position before and after the conveyances," so the transaction is a mere change of form exempt under §1405(b)(6) — consistent with its own prior rulings TSB-A-01(3)R (Columbus Centre LLC), TSB-A-99(3)(R) (Armory Place LLC), and TSB-A-94(3)R (115 Spring Street Company).

What this means for you

Construction-cost reimbursements between co-developers aren't RETT conveyances at all

If you're a tenant in common paying your proportional share of a co-developer's construction costs for your designated portion of a project, that payment itself isn't consideration for a real property conveyance and falls outside RETT entirely — no exemption analysis is even necessary.

A TIC-to-condo-unit swap can be RETT-exempt if the underlying economics never actually shifted

Converting jointly-held tenant-in-common property into a condominium and then distributing separate, distinct units to each co-owner (matching what each party's contractual rights already limited them to) can qualify as a tax-free "mere change of form" under Tax Law §1405(b)(6) -- as long as the contractual arrangement locked in each party's beneficial interest in its designated space from the start of construction.

Lock in each party's exclusive economic rights to its designated space from day one

This ruling and its cited precedents (TSB-A-01(3)R, TSB-A-99(3)(R), TSB-A-94(3)R) turn on evidence that neither co-owner could benefit from the other's portion at any point -- no control, no right to sell/lease/encumber, no share of proceeds. Structuring a TIC-to-condo development deal this way from inception supports treating the eventual title-clean-up conveyances as exempt.

Common questions

Q: Do I owe RETT when I reimburse my co-developer for my share of construction costs on our joint project?
A: No -- a payment for construction costs is not consideration for a conveyance of real property, so it isn't subject to RETT at all.

Q: When our TIC ownership finally converts into separate condo units matching our original interests, is that a taxable sale?
A: It is a "conveyance" under Tax Law §1402(a)/§1401(e), but it can qualify for the Tax Law §1405(b)(6) mere-change-of-form exemption if each party ends up with exactly the beneficial interest it already held throughout the project -- only the legal form changes.

Q: What made the Department confident the parties' beneficial ownership didn't change here?
A: The TIC Agreement gave each party exclusive economic rights to its designated space throughout construction -- no control, sale, lease, or encumbrance rights over the other party's portion -- so converting that into separate condo titles didn't shift who actually benefited from what.

Citations and references

Statutes and guidance:

• Tax Law §1402(a)
• Tax Law §1401(e)
• Tax Law §1405(b)(6)
• TSB-A-01(3)R (Columbus Centre LLC)
• TSB-A-99(3)(R) (Armory Place LLC)
• TSB-A-94(3)R (115 Spring Street Company)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_2013.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a13_7r.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-13(7)R
Real Estate Transfer Tax
October 17, 2013

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M130226A

The Department of Taxation and Finance received three related Petitions for Advisory
Opinions from names and addresses redacted. Petitioners (1) and (2) are New York limited
liability companies that have the same principal and are referred to herein as “Owners.”1
Petitioner (3), a Delaware limited liability company referred to herein as “Developer,” is not
affiliated with “Owners.” Petitioners ask whether New York State (NYS) real estate transfer
taxes will be due on certain conveyances of interests in real property that will take place.
We conclude that transfer taxes are not owed on the conveyances.
Facts
Owners owned the property in Manhattan (“the Property”) that is the subject of this
Advisory Opinion. On March 2, 2006, Owners and Developer executed a contract (“the
Contract”) and deeds, whereby Owners and Developer became tenants in common in the
Property. Owners retained an undivided 12.32% interest in the Property and conveyed an
undivided 87.68% interest in the Property to Developer. At the closing, all the transfer taxes
then due and owing were paid to New York City and to New York State.
Simultaneously with Owners’ conveyance to Developer of the 87.68% tenant in common
(TIC) interest in the Property, Owners and Developer entered into a TIC and Retail Unit
Construction and Exchange Agreement (the “TIC Agreement”). Pursuant to the TIC Agreement,
Developer arranged financing and engaged a contractor to construct a building on the Property,
12.32% of which would be ground floor Commercial Space corresponding to Owners’ retained
interest in the Property. The TIC Agreement obligated each party to pay its pro-rata share of the
costs to construct the building. Owners were required to reimburse Developer a “contract sum”
representing the Owners’ share of Developer’s actual hard and soft costs for the design and
construction of the Commercial Space. Developer was obligated to pay the costs of constructing
and designing the remainder of the building, which would be comprised of residential units.
During the construction of the building, Owners had no control except with respect to the
Commercial Space.
The TIC Agreement also provided that the completed building would be converted into a
condominium, pursuant to Article 9-B of the Real Property Law, with the Commercial Space
1

Before converting to limited liability companies (LLCs) in 2010, Owners operated as partnerships. For purposes of
this Advisory Opinion, the term “Owners” includes the Owners’ present and former status.

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TSB-A-13(7)R
Real Estate Transfer Tax
October 17, 2013

comprising one unit and the floors above the Commercial Space comprised of residential units.
Upon completion of the construction and the payment by Owners of the design and construction
costs of the Commercial Space and proportional costs of the common areas benefiting the
Commercial Space, Owners would transfer their 12.32% TIC interest in the Property to
Developer, and Developer would transfer its undivided interest in the Commercial Space
condominium unit to Owners, including the respective percentage of common interests attributed
to the Commercial Space. Following the transfers, Owners would hold all right, title and interest
in and to the Commercial Space, and Developer would hold all right, title and interest in and to
the residential units, except that each party would share proportionate ownership of the common
space. Owners would have no control over the residential units and could not benefit from their
sale or lease, and Developer would have no control over the Commercial Space and could not
benefit from its sale or lease. A Declaration of Condominium, signed by Owners and Developer
and dated June 6, 2012, was recorded on July 25, 2012.
Petitioners ask (1) whether real estate transfer taxes will be due and payable by either
Owners or Developer upon the payment by Owners to Developer of $4,275,000, which
represents Owners’ share for the hard and soft costs pertaining to the construction of the
Commercial Space; (2) whether transfer taxes will be due and payable by either Owners or
Developer upon Owners’ conveyance to Developer of Owners’ 12.32% undivided TIC interest in
the Property; and (3) whether transfer taxes will be due and payable by either Owners or
Developer upon Developer’s conveyance to Owners of the Commercial Space condominium unit
in fee simple.
Analysis
Under Tax Law §1402(a), a tax is imposed on each conveyance of real property or
interest therein. A “‘[c]onveyance’ means the transfer or transfers of any interest in real property
by any method....” Tax Law §1401(e). However, conveyances that “effectuate a mere change of
identity or form of ownership or organization where there is no change in beneficial ownership”
are not subject to this tax. Tax Law §1405(b)(6).
The payment by Owners to Developer for the construction costs attributable to the
Commercial Space is not a payment of consideration for a conveyance of an interest in real
property and, thus, would not be subject to transfer taxes.
A conveyance by Owners of their 12.32% undivided interest in the Property to Developer
would be a conveyance of an interest in real property: when Owners convey to Developer the
12.32% undivided interest in the property, the Petitioners’ tenancy in common will be severed,
and Developer will become the sole fee owner of the Property. Likewise, the conveyance to
Owners by Developer of the fee interest in the Commercial Space condominium unit would also
be a conveyance of an interest in real property.
Pursuant to the TIC Agreement, Developer has a nominal undivided interest in the
Commercial Space, but Developer has no right to sell, lease, license, use, or further encumber the

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TSB-A-13(7)R
Real Estate Transfer Tax
October 17, 2013

unit. After the conveyances, Owners will have a fee interest in the commercial space equal to
the fee interest in the Property that they had prior to the construction of the building. Likewise,
pursuant to the TIC Agreement, all proceeds from the sale or lease of any residential
condominium unit can accrue solely to Developer, and Owners have no right to sell, lease, use,
or further encumber any of the residential condominium units. After the conveyances,
Developer will own the same beneficial interest in the Property (i.e., the portion attributable to
the residential units) that it acquired under the Contract. The parties were in exactly the same
position before and after the conveyances. Accordingly, these two conveyances would effect a
mere change of identity or form of ownership or organization with no change in beneficial
ownership and, thus, would be exempt from the Tax Law §1402(a) real estate transfer taxes. See
Tax Law §1405(b)(6); TSB-A-01(3)R, Columbus Centre LLC; TSB-A-99(3)(R), Armory Place
LLC and TSB-A-94(3)R, 115 Spring Street Company.

DATED:

October 17, 2013

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

NOTE:

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.