My partnership is constructing an office building at 32 Old Slip in lower Manhattan, with the base building finishing in phases (elevator banks completed on different dates) and individual floors being built out for tenants as leases are signed. Can I allocate construction-period interest, real property taxes, insurance, security, and specifically identified indirect project costs to each floor by square footage, for gains-tax original-purchase-price purposes?

Plain-English summary

This tax no longer exists. New York's Real Property Transfer Gains Tax (former Article 31-B of the Tax Law) was a 10% tax on the GAIN from transferring New York real property where consideration was $1 million or more. It was repealed for any transfer occurring on or after June 15, 1996. This 1987 opinion is preserved here for historical and research value, not as current law.

Assay Partners, a New York partnership, owned and leased an office building at 32 Old Slip in New York City, financed by Bankers Trust Company. Construction began in March 1984 and proceeded in two stages: the first stage (foundation, shell, core, and lobby) was substantially complete, evidenced by a temporary certificate of occupancy, with the building's four separate elevator banks reaching substantial completion on staggered dates -- January, March, April, and June 1987. The second stage -- fitting out individual leased floors to tenant specifications, including air-conditioning, sprinklers, flooring, lighting, and partitions -- began in February 1987 and was ongoing, with completion estimated for late 1988. Because the building wasn't finished all at once, the Partnership proposed allocating construction-period interest, real property taxes, insurance, security, and specifically identified indirect project costs to each floor in proportion to that floor's share of total building square footage, through the date each floor's own construction ended.

This is one of a small group of near-identical opinions issued the same spring to different Manhattan office-building partnerships (all sharing the same 126 East 56th Street ownership/counsel address), each raising the exact same allocation question for a different building under construction. As in the companion rulings, the Department confirmed that construction-period interest, taxes, insurance, security, and specifically identified indirect project costs are includible in the cost of a capital improvement under former 20 NYCRR § 590.16(d) (with general/administrative overhead, like corporate management salaries, always excluded), and ruled that because the regulations don't prescribe a specific staged-construction allocation method, the Partnership's proposed square-footage-based, floor-by-floor method would be accepted as proper so long as it results in an equitable allocation -- subject to former 20 NYCRR § 590.16(e)'s rule that costs stop accruing during any suspension of construction activity between stages.

What this means for you

Developers building out office space floor-by-floor for different tenants

When a building is completed in stages -- including a base building finished in staggered elevator-bank phases -- a floor-by-floor cost allocation tied to square footage was an acceptable way to determine original-purchase-price costs for gains-tax purposes, as long as the method was equitable.

Real estate accountants tracking capital-improvement costs during a phased construction project

Indirect project costs clearly tied to the specific project were includible; general corporate overhead was not, regardless of the allocation method chosen for staged construction.

Tax attorneys advising on multi-year, multi-tenant office build-out projects

A pattern worth noting: several large Manhattan office landlords sought the same ruling on the same construction-cost-allocation question around the same time in 1987, suggesting this was a common, market-standard financing and leasing structure for phased office construction in that era.

Common questions

Q: Does this construction-cost-allocation rule still matter today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996.

Q: Why did the base building itself finish in staggered phases (the four elevator banks)?
A: The opinion doesn't explain the construction-sequencing reasons, only that the building's core systems (including its four elevator banks) reached substantial completion on four different dates in 1987 -- the Department's ruling treated this as part of the ordinary staged-construction fact pattern the allocation method needed to address.

Q: What happens to costs incurred during a gap in construction?
A: They aren't included -- former 20 NYCRR § 590.16(e) treats a suspension of construction activity as ending the construction period for cost-accrual purposes during that gap.

Q: Can another developer completing a similar project rely on this exact ruling?
A: No, apart from the repeal -- an Advisory Opinion binds the Department only as to the petitioner and facts presented, though several near-identical Manhattan office landlords received the same result on the same question in 1987.

Citations and references

Statutes and regulations:

• former 20 NYCRR § 590.16(d) (construction-period interest, taxes, insurance, and specifically identified indirect project costs are includible in the cost of a capital improvement; general/administrative overhead costs are not)
• former 20 NYCRR § 590.16(e) (the construction period ends when the property is substantially complete and ready for use; for staged projects, allowable costs cease on each completed part; a suspension of construction activity ends the construction period for cost-accrual purposes)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a87_5r.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-87 (5) R
Real Property Transfer
Gains Tax
April 23, 1987

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. M870303A

On March 3, 1987, a Petition for Advisory Opinion was received on behalf of ASSAY
PARTNERS, located at 126 East 56th Street, 30th Floor, New York, New York 10022.
The issue raised is whether the method proposed by Petitioner for determining the amount
of interest on loans incurred in the construction of a building, construction period real property taxes,
the cost of insurance, security and specifically identified indirect project costs to be included in the
original purchase price of a building for purposes of computing the Real Property Transfer Gains Tax
imposed by Article 31-B of the Tax Law (hereinafter the Gains Tax) would be accepted by the
Department.
The facts as presented are as follows: the Petitioner, a New York partnership, owns an office
building (hereinafter the Building) in New York City at 32 Old Slip. Financing for the construction
of the Building was provided by Bankers Trust Company. The Petitioner has leased and intends to
continue to lease floors of the building to individual tenants and has completed construction on some
of the floors in the Building and intends to complete construction of the balance of the floors in the
Building according to tenants' specifications.
Construction began in March of 1984 and has occurred in two stages. During the first stage,
the Building's foundation, shell (including external walls), core and lobby were substantially
completed, as evidenced by the issuance of a temporary certificate of occupancy.
It is estimated that the first stage of construction will be substantially completed as follows:
first elevator bank in January 1987, second elevator bank in March 1987, third elevator bank in April
1987 and fourth elevator bank in June 1987.
During the second stage, the Petitioner enters into leases covering one or more floors with
individual tenants and completes construction of the leased floor(s) according to the particular
tenant's specifications. The second stage of construction is now ongoing and includes as to each
floor the installation of air-conditioning ducts, sprinkler systems, flooring, ceiling, lighting, electrical
and telephone outlets and any necessary partitions on the particular leased floor(s). The second stage
of construction began in February 1987 and, depending on market conditions, the Petitioner
estimates that the second stage of construction will be complete in the last quarter of 1988.
Since construction of the building will not be completed at a single time, but rather on a floor
by floor basis, Petitioner proposes that, in computing the original purchase price of the Building,
interest on loans incurred in connection with the construction of the Building, construction period
real property taxes, insurance, security and specifically identified indirect project costs be allocated

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

FRANK J. PUCCIA, DIRECTOR

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER

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TSB-A-87 (5) R
Real Property Transfer
Gains Tax
April 23, 1987

to a particular floor in proportion to the ratio of that floor's square footage to the Building's total
square footage and such amounts be included in the Building's original purchase price to the extent
paid or accrued through the date that construction ends with respect to that floor.
Gains tax regulations section 590.16(d) states in pertinent part as follows:
Q.

What additional costs are allowed if incurred during a construction period?

A.

Other costs that are clearly associated with construction of a real estate project
can also be included as a cost of constructing a capital improvement. If the
capital improvement requires a construction period, a period of time in which
necessary activities are conducted to bring the improvement on the real property
to that state or condition necessary for its intended use, the interest cost paid
during that period on a construction loan, real property taxes, insurance or
similar items are includible as a cost of construction.

Also, section 590.16(d) of the Gains Tax Regulations states in pertinent part as follows:
Indirect project costs may also be included in original purchase price if they are
specifically identified with a project. Indirect project costs are indirect costs incurred
after the acquisition of the property, such as construction administration costs, legal
fees, and various office costs (cost accounting expenses, design costs, and other
expenses of departments providing services to projects), that clearly relate to projects
under construction. The full amount of indirect project costs that clearly relate to a
specific project, such as costs associated with a field office at a project site and the
administrative personnel that staff the office, may be added to the cost of the capital
improvement. However, indirect project costs which relate to numerous projects must
be allocated in a rational manner to the projects to which the cost relate based on the
nature of activity that gave rise to the costs.
Indirect project costs that do not clearly pertain to projects under construction and all
general and administrative costs cannot be added to the cost of capital improvement.
General and administrative costs include such costs as corporate management salaries,
general accounting expenses, corporate office expenses, general legal fees, and similar
costs which are generally incurred by all enterprises in the conduct of business.
Furthermore, section 590.16(e) of the Gains Tax regulations states in pertinent part as follows:
The construction period ends when the real property is substantially complete
and ready to be placed in service. Some construction projects are completed in sections,

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TSB-A-87 (5) R
Real Property Transfer
Gains Tax
April 23, 1987

leaving part of the real property capable of being used independently while
construction continues on other sections. For such projects, allowable construction
period expenses shall cease on each part when it is substantially complete and ready
for use. A construction period for a project may be suspended before a project is
completed for various reasons, such as insufficient sales or insufficient rental
demands. In such a case, the construction period has ended, and the costs allowed
during a construction period will no longer be allowed.
Accordingly, the costs of interest on construction loans incurred in connection with the
construction of the Building, construction period real property taxes, insurance, security, and
specifically identified indirect project costs incurred during a construction period are allowed as costs
of constructing a capital improvement. The specific method of allocating such costs in the case of a
construction project which is completed in steps is not specifically stated in the Gains Tax regulations.
However, the method chosen by the Petitioner of allocating such costs would be deemed a proper
method as long as it results in an equitable allocation.
Furthermore, as provided at section 590.16(e) of the Gains Tax regulations, if there is a
suspension of the construction activity between the end of the first stage of construction and the
beginning of the second stage, the costs allowed during a construction period will no longer be allowed
between such stages.

DATED: April 23, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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