Our state university system is leasing a building for a college, to be financed through publicly sold certificates of participation. The landlord's construction obligations will be secured by a mortgage naming us as mortgagee -- to protect us if the landlord defaults on the required renovation work, not because we're the real economic lender. Is recording that mortgage, and later assigning it to a bond trustee, exempt from mortgage recording tax?

Plain-English summary

CUNY entered a Capital Lease-Acquisition Agreement with a private landlord (Metropolis Realty Co. and affiliated parties) to obtain space at Tenth Avenue between 58th and 59th Streets in Manhattan for John Jay College of Criminal Justice. Under the deal, the landlord would renovate the existing building and construct an integrated annex on an adjacent vacant lot ("Landlord's Work"). The 20-year lease term would begin once Landlord's Work was substantially complete (or, if sooner, three years after the financing closed) — at which point fee title to the property would be conveyed to the State of New York (which owns all CUNY senior college real property under Education Law § 6219), subject to CUNY's lease.

Financing for the deal came through roughly $220 million in Certificates of Participation in the lease, sold to the public under a Trust Agreement among the landlord, CUNY, and a bank trustee. About $155 million of that would pay the landlord for its construction work and the eventual conveyance to the State; the rest funded capitalized interest, reserves, and issuance costs. The Certificates were repaid solely from CUNY's basic rent payments (funded from CUNY's State operating-budget appropriations), with interest exempt from federal and state income tax — making them look, from an investor's perspective, much like tax-exempt municipal bonds, with CUNY (not the landlord) treated as the issuer for tax purposes.

To protect CUNY against a serious construction default by the landlord — this was its primary purpose, not to secure a loan CUNY was making — the landlord's obligations to complete Landlord's Work and eventually convey title were secured by a mortgage naming CUNY as mortgagee. During the construction period, CUNY would exercise all rights of the mortgagee, and per the deal's basic economics (CUNY bears essentially all transaction expenses except the landlord's own counsel fees), CUNY was required to record the mortgage and pay any mortgage recording tax due. Roughly three years later, once construction was done, CUNY would assign its interest in the mortgage to the trustee, with no new or further indebtedness added by that assignment.

The Department confirmed both the initial recording and the later assignment escape mortgage recording tax — but for two DIFFERENT reasons. On the initial recording: CUNY, as an instrumentality of the State of New York, carries tax immunity for all taxation under Education Law §§ 6201 and 6203 (citing City of New York v. Tully), so recording the mortgage is exempt outright — with the Department noting the practical mechanic that CUNY establishes this exemption at recording by having an officer submit an affidavit asserting the right to it (which could simply attach a copy of this Advisory Opinion). On the later assignment to the trustee: the Department reasoned differently — an assignment of a mortgage that doesn't itself secure any new debt "does not constitute a mortgage within the meaning and intent of Article 11 of the Tax Law" at all (citing Matter of the Application of Joseph A. DeLorenzo), meaning it falls entirely OUTSIDE the mortgage recording tax's scope, rather than merely qualifying for an exemption within it.

What this means for you

Public universities and state instrumentalities using construction-security mortgages

If your institution takes a mortgage from a private counterparty purely to secure THEIR performance obligations (not because you're lending money), your own state-instrumentality tax immunity covers that recording — this doesn't require the elaborate "pass-through mortgagee for a private lender" structuring seen in UDC/RIOC/Battery Park City rulings, because here CUNY genuinely is the real party in interest on the mortgage.

Bond counsel structuring certificates-of-participation financing

This ruling shows how a certificates-of-participation lease financing (functionally similar to a municipal bond) can incorporate a genuine security mortgage without mortgage recording tax exposure, and confirms that a LATER assignment of that mortgage to a bond trustee — as long as it doesn't add new secured debt — isn't a taxable event at all, since a bare assignment isn't considered a "mortgage" under Article 11.

Accountants and real estate attorneys documenting the exemption at recording

Take note of the practical mechanic described here: an instrumentality claiming this exemption should have an officer submit an affidavit asserting the right to the exemption at the time of recording, and can attach the Advisory Opinion itself as support.

Common questions

Q: Why is this different from the UDC/RIOC/Battery Park City "pass-through mortgagee" rulings?
A: In those rulings, the public authority is named mortgagee purely to extend its tax immunity to a private lender's economic interest. Here, CUNY is the mortgagee for its OWN genuine benefit -- to protect against the landlord's construction default -- so the exemption follows straightforwardly from CUNY's own instrumentality status, without needing the pass-through analysis.

Q: Does assigning the mortgage to the bond trustee later trigger mortgage recording tax?
A: No, but not because of an exemption -- the Department held a bare assignment that doesn't secure new debt simply isn't a "mortgage" within Article 11's scope at all, so the tax never applies to it in the first place.

Q: How does an instrumentality actually claim this exemption when recording?
A: By having an officer submit an affidavit asserting the entity's right to the exemption to the recording officer, which may attach a copy of the supporting Advisory Opinion.

Q: Can another public university or instrumentality rely on this specific ruling?
A: No. It binds the Department only as to CUNY and these facts, though the underlying instrumentality tax immunity principle (Education Law §§ 6201, 6203; City of New York v. Tully) is a general doctrine likely to apply to similarly situated state instrumentalities.

Citations and references

Statutes:

• Tax Law § 253 (mortgage recording tax on real property mortgages)
• Tax Law § 253-a (New York City mortgage recording tax)
• Education Law § 6201 (CUNY as a state instrumentality)
• Education Law § 6203 (CUNY tax immunity)
• Education Law § 6219 (State ownership of CUNY senior college real property)

Case law cited:

• City of New York v. Tully, 86 A.D.2d 330 (1982) (state instrumentality mortgagee immunity)
• Matter of the Application of Joseph A. DeLorenzo, Decision of the State Tax Commission (Dec. 8, 1976) (a bare assignment securing no new debt is not a "mortgage" under Article 11)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/mortgage_rec_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/mortgage/a86_1m.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (1) M
Mortgage Tax
August 22, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. M860728A

On July 28, 1986, a Petition for Advisory Opinion was received from The City University
of New York, 535 East 80th Street, New York, New York 10021.
The issue raised is whether a mortgage to be presented for recording by The City University
of New York (hereinafter "CUNY") with respect to the transaction described below is exempt from
the mortgage recording tax imposed by New York Tax Law 253 and 253-a (hereinafter the
"Mortgage Recording Tax").
The facts as presented are that CUNY has entered into a Capital Lease - Acquisition
Agreement (hereinafter the "Lease") dated June 30, 1986 with Metropolis Realty Co., Inc., a New
York corporation, Metropolis Studios Associates, a New York limited partnership, and James E.
Fusco and Robert J. Reveley, individuals (collectively, "Original Landlord"), pursuant to which
CUNY will lease certain premises (hereinafter the "Premises") located at Tenth Avenue between
58th and 59th Streets, New York City for use by John Jay College of Criminal Justice (hereinafter
"John Jay"). The Lease is subject to the approvals of the State Budget Division and the State
Departments of Law and Audit and Control.
The Lease requires Original Landlord to renovate existing improvements and construct an
integrated annex on an adjacent vacant lot (collectively, "Landlord's Work"). The lease term will
commence on the earlier of substantial completion of Landlord's Work or the third anniversary of
the issuance of the certificates of participation (discussed below), at which time fee title to the
Premises will be conveyed to the State of New York (hereinafter the "State"), subject to the Lease
to CUNY. The State owns all CUNY senior college real property. (Education Law, 6219) The
Lease term is 20 years.
Pursuant to a Trust Agreement (hereinafter the "Trust Agreement") to be entered into as of
August 1, 1986 between Metropolis Realty Co., Inc. (hereinafter "Metropolis"), CUNY, and Chase
Lincoln First Bank, N.A. (hereinafter the "Trust"), Certificates of Participation in the Lease (the
"Certificates") in an aggregate principal amount of approximately $220,000,000 will be sold to the
public. Approximately $155,000,000 of the proceeds from the sale of Certificates will be paid to
Original Landlord in connection with Landlord's Work and the conveyance of the Premises to the
State. The balance of the proceeds will be used to fund capitalized interest and other reserves, and
to pay other issuance costs. The Certificates will be repaid solely from the basic rent paid by CUNY
under the Lease, which will be funded from State appropriations for CUNY's operating budget. The
Original Landlord has no responsibility to repay the Certificates. CUNY, not Original Landlord, will
be the issuer of the Certificates for tax purposes. The interest is exempt from Federal and State
income taxes. Thus, from the Certificate holder's point of view, the Certificates look very much like
tax-exempt municipal bonds.

RODERICK G. W. CHU, COMMISSIONER
GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR
TP-8 (3/83)

-2­
TSB-A-86 (1) M
Mortgage Tax
August 22, 1986

Original Landlord's obligation to perform Landlord's Work and to convey the Premises to the
State will be secured by a mortgage (hereinafter the "Mortgage") for the benefit of CUNY. The
Mortgage will be executed and recorded when the Certificates are issued. The mortgagor will be
Original Landlord, the owner of the mortgaged property. The mortgagee will be CUNY.
The Mortgage plays two roles in the transaction. During the construction period, it secures
the Original Landlord's obligations to CUNY to do the construction work required by the Lease.
This is the primary function of the Mortgage. It was introduced into the transaction at CUNY's
request in order to protect CUNY against a serious default by the Original Landlord in performing
its construction work. During the construction period, CUNY exercises all rights of the mortgagee.
Under the Lease and the Mortgage, CUNY is required to present the Mortgage for recording
and to pay all mortgage recording taxes. This is consistent with the basic economic deal between
CUNY and Original Landlord that all expenses of the transaction (except Original Landlord's
counsel fees) will by paid by CUNY, either directly or from the proceeds of the Certificates.
After approximately three years, pursuant to the Trust Agreement, CUNY will covenant to
assign its interest in the Mortgage (hereinafter the "Assignment") to the Trustee. After the
Assignment, the Mortgage will not secure any new or future indebtedness or obligation other than
that secured by the original recorded Mortgage.
Based on the foregoing, Petition contends that since CUNY, as an instrumentality of the
State, is immune from taxation (Education Law 6201 and 6203), the recording by CUNY of the
Mortgage as well as the subsequent assignment of the Mortgage by CUNY to the Trustee are exempt
from the Mortgage Recording Tax.
CUNY, as an instrumentality of the State of New York, is immune from all taxation.
Accordingly, the recording of the Mortgage by CUNY is exempt from the Mortgage Recording Tax.
City of New York v. Tully, (1982) 86 AD2d 330, 451 NYS 2d 261.
At the time of recording the mortgage, CUNY may establish its exemption by submitting to
the recording officer an affidavit of an officer of CUNY asserting CUNY's right to the exemption.
A copy of this opinion may be attached to the affidavit.

-3­
TSB-A-86 (1) M
Mortgage Tax
August 22, 1986

As for the taxability of the Assignment, such Assignment will not be subject to the Mortgage
Recording Tax since the Assignment does not constitute a mortgage within the meaning and intent
of Article 11 of the Tax Law. Matter of the Application of Joseph A. DeLorenzo, Decision of the
State Tax Commission, December 8, 1976.

DATED: August 22, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.