My 1958 lease, grandfathered because it predates New York's Real Property Transfer Gains Tax, already contains two 30-year renewal options with a rent formula built in. The tenant is now exercising the first renewal, and we're negotiating the exact renewal rent (per the lease's own formula) plus a brand-new, THIRD 30-year renewal option we're independently agreeing to grant, on similar terms. Does either step -- setting the renewal rent, or granting the new independent option -- break the lease's grandfathered status?

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 It was repealed for any transfer occurring on or after June 15, 1996.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 1988 opinion is preserved here for historical and research value, not as current law.

Loomis J. Grossman, as landlord, had leased Manhattan commercial property (645-649-651 Madison Avenue and 18 East 60th Street) since May 29, 1958 -- more than two decades before the gains tax existed. Through a series of assignments, the tenant's position eventually passed to Equitable-Nissei Madison Company. The original 1958 lease provided a 30-year initial term plus rights to TWO additional 30-year renewal periods, with rent for each renewal set by a built-in formula (a percentage of the land's fair market value, with negotiated dollar minimums, and arbitration as a fallback if the parties disagreed). Equitable-Nissei gave notice exercising the FIRST renewal option, and the parties negotiated and tentatively agreed on the specific rent figures the formula would produce for that renewal term. Separately, going beyond what the 1958 lease itself provided for, the landlord also tentatively agreed to grant a brand-new THIRD 30-year renewal option, on economic terms determined the same way as the original two.

The Department addressed the landlord's two questions separately. First: applying the standard nonsubstantial-amendment rule for grandfathered pre-1983 contracts (former 20 NYCRR § 590.21(a)), merely calculating and formalizing the rent for a renewal period IN THE MANNER THE LEASE ITSELF ALREADY SPECIFIED isn't a substantial modification -- it's simply applying a formula the parties agreed to decades earlier, so it doesn't create a new lease or jeopardize the grandfathered exemption. Second, and more consequentially: the Department held that granting an ENTIRELY NEW renewal option -- one that goes beyond what the original grandfathered lease itself provided for -- is analyzed INDEPENDENTLY of the grandfathered lease's own term, rather than being aggregated with it. Since this new third renewal option, standing alone, ran for less than 49 years and wasn't coupled with a purchase option, granting it wasn't a taxable transfer of real property by itself. The Department flagged an important forward-looking caveat, though: while THIS new option escaped tax on its own, its term WOULD be aggregated with any FURTHER additional renewal options the parties might grant later, or with a purchase option if one were ever added -- so a later, similar move could tip the combined term over 49 years and become taxable.

What this means for you

Ground lessors negotiating with a long-term tenant under an old, grandfathered lease

Under this now-repealed tax, formalizing rent for a renewal period your original lease already contemplated wasn't a risky move for your grandfathered exemption -- but layering on a genuinely NEW renewal right beyond what the lease originally provided was analyzed as its own separate, independent transaction (helpful if kept under 49 years, but a running tally to watch for future additions).

Commercial tenants and landlords adding renewal rights to decades-old leases

This opinion, read alongside TSB-A-87(8)R (also in this corpus, where a SUBSTANTIAL extension and rent increase to the CORE lease term DID create a new taxable lease), shows the line the Department drew: modifying the EXISTING lease's core term substantially is different from adding a genuinely NEW, independent renewal right that stands on its own.

Real estate attorneys structuring incremental additions to grandfathered leases

The Department's explicit warning -- that this new option's term would be aggregated with FUTURE additional renewal options or a future purchase option -- is a critical planning point: a series of "safe," under-49-year additions can eventually stack up into a taxable transfer once combined.

Common questions

Q: Does this renewal-option independence rule still matter today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996. Current New York real estate taxes have their own separate rules for lease renewals.

Q: Why was setting the FIRST renewal's rent treated so differently from the SECOND ruling's lease extension (TSB-A-87(8)R)?
A: Because here, the landlord and tenant were simply calculating a number the 1958 lease's OWN FORMULA already dictated -- not changing the deal's terms. In TSB-A-87(8)R, by contrast, the parties were substantially extending the lease's TERM itself and separately raising the rent, which the Department found went well beyond mechanically applying an existing formula.

Q: Why would the NEW third renewal option's term matter for FUTURE transactions if it wasn't taxable now?
A: Because the Department explicitly reserved the right to aggregate this new option's term with any LATER additional renewal options or a later purchase option -- so while this specific 30-year addition stayed under the radar alone, stacking further additions on top of it could eventually cross the 49-year line.

Q: Can another landlord granting a similar new renewal option 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, and this result depended on the specific structure of the original 1958 lease's renewal formula and the standalone nature of the new third option.

Citations and references

Statutes and regulations:

• former Tax Law § 1440.7 (a leasehold is a taxable transfer only if combined term/renewals exceed 49 years, substantial capital improvements are made, and it covers substantially all the premises; a leasehold coupled with a purchase option is taxable regardless of term)
• former Tax Law § 1443.6 (grandfather exemption for a transfer pursuant to a written contract entered into before the gains tax's effective date, with the execution date confirmed by independent evidence)
• former 20 NYCRR § 590.21(a) (a grandfathered pre-March 28, 1983 contract remains exempt after a later nonsubstantial amendment, determined case by case)
• former 20 NYCRR § 590.5(a) (creation of a leasehold/sublease is a taxable transfer only if combined term/renewals exceed 49 years, substantial capital improvements are made, and it covers substantially all -- 90% or more -- of the premises)
• former 20 NYCRR § 590.5(b) (a leasehold coupled with a purchase option is always taxable, regardless of the lease's own term)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a88_2r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (2) R
Real Property Transfer
Gains Tax
July 26, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M880504B

On May 4, 1988, a Petition of Advisory Opinion was received on behalf of Loomis J.
Grossman located at Haviland Road, Harrison, New York 10528.
The issues raised concern the application of the Real Property Transfer Gains Tax imposed
by Article 31-B of the Tax Law (hereinafter the "Gains Tax") to the following factual situation.
On May 29, 1958, Petitioner, as landlord, entered into a lease with Aaron Levine and Anna
Levine (the "Levine's"), as tenants for the premises known by the street addresses of 645-649-651
Madison Avenue and 18 East 60th Street, New York (collectively the "demised premises"). A
memorandum of such lease was recorded in the New York County Office of the City Register of the
City of New York (the "City Register's Office"). On September 10, 1959, the lease was assigned by
the Levine's to the 645-651 Madison Avenue Corporation (hereinafter the "Madison Corp."), which
assignment was recorded in the City Register's Office.
On August 1, 1973, certain lease amendments were agreed to between Petitioner and
Madison Corp. Such amendments were recorded in the City Register's Office. On May 30, 1975, the
lease was assigned by Madison Corp. to Presidential Realty Corporation (hereinafter "Presidential"),
which assignment was recorded in the City Register's Office.
Presidential assigned the lease to the Equitable Life Assurance Society of the United States
(hereinafter "Equitable Life") by an assignment dated September 19, 1975, which assignment was
later recorded in the City Register's Office.
The lease was subsequently assigned by Equitable Life
to the Equitable-Nissei Madison Company (hereinafter "Equitable-Nissei") on July 15, 1981, which
assignment was recorded in the City Register's Office.
The lease provides for an initial term of thirty years commencing on June 1, 1958. Petitioner
also granted the tenant the right to extend the term of the lease for two additional thirty year periods
under certain terms and conditions.
Moreover, the lease provides that the net annual rent to be paid by the tenant to the landlord
during each lease renewal option term would be 6% of the fair market value of the demised premises,
considered as unimproved as of a date six months before commencement of the renewal term, plus
$4,800, however, in the case of the first lease renewal option, not less than $56,000, and in the case
of the second lease renewal option, not less than the greater of $56,000 (which is the net annual rent
during the lease's initial thirty year term), or the net annual rent payable by the tenant during the first
renewal term.

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

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-88 (2) R
Real Property Transfer
Gains Tax
July 26, 1988

The lease provisions governing the lease renewal options provide that the parties shall have
the opportunity to agree on the value of the land which pursuant to the rental formula would amount
to an agreement on the new annual rent payable during the lease renewal option term. In the absence
of such agreement, the lease provides that the net annual rental for the lease renewal option term
shall be fixed and determined by arbitration.
Equitable-Nissei has given Petitioner notice that it desires to exercise the first lease renewal
option. Pursuant to negotiations which have taken place between Petitioner and Equitable-Nissei,
the landlord and tenant have tentatively agreed to the rent that will be paid during the first thirty year
lease renewal option term. This tentative agreement contemplates that the tenant will pay the
landlord a net per annum rent of $1,300,000 during the first ten years, $1,400,000 during years
eleven through twenty, and $1,500,000 during years twenty-one through thirty.
In addition to negotiating the exercising of the first lease renewal option, the tenant and
landlord have negotiated, and the landlord has tentatively agreed to provide the tenant, an additional
thirty year renewal option under economic terms to be determined in a manner identical to those
provided under the two lease renewal options provided in the lease.
It is Petitioner's contention that neither the modification of the lease to determine the rental
payments during the first lease renewal option nor the grant of an additional thirty year renewal
option are transfers subject to the gains tax since the modification merely establishes the rent payable
to the landlord by the tenant during the first lease renewal option in a manner specifically provided
for under the terms of the lease. Such modification in Petitioner's opinion is a non-substantial
amendment to a grandfathered lease. The grant of the additional renewal option viewed independent
from the grandfathered lease in the opinion of Petitioner is not a transfer of real property since such
right provides, at most, for the creation of a leasehold interest of less than forty-nine years.
Section 1443.6 of the Tax Law provides an exemption from the gains tax where a transfer
of real property occurring after the effective date of Article 31-B (March 28, 1983) is pursuant to a
written contract entered into on or before the effective date of such article, provided that the date of
execution of such contract is confirmed by independent evidence, such as recording of the contract,
payment of a deposit or other facts and circumstances as determined by the Tax Department.
Gains Tax Regulation 590.21(a) provides, in pertinent part, that where a contract entered into
on or before March 28, 1983 is amended after such date, such contract will continue to be exempt
by reason of section 1443.6 of the Tax Law as long as the amendment is of a nonsubstantial nature.

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TSB-A-88 (2) R
Real Property Transfer
Gains Tax
July 26, 1988

Where a grandfathered lease is modified, such modifications will result in the creation of a
new lease for gains tax purposes if the modifications are determined to be substantial in nature. The
determination of what constitutes substantial modifications to a grandfathered lease must be made
on a case by case basis. If the modifications made to a grandfathered lease are determined to be
substantial in nature, a new lease is deemed to be created for gains tax purposes and the terms of
such new lease are deemed to start on the effective date of such modifications.
The modification to a grandfathered lease to determine and set forth the rental payments for
a renewal period in the specific manner provided for in the grandfathered lease, does not constitute
a substantial modification to such lease. Therefore, a new lease is not created for purposes of the
gains tax as a result of such modification, and such modification, in and of itself, does not result in
the imposition of the gains tax.
As for the grant of an additional renewal option, the term of such renewal option will not be
aggregated with the term of a lease created prior to the effective date of the statute for purposes of
determining whether such lease and renewal option meet the criteria of a taxable lease, provided no
substantial changes have been made to the grandfathered lease. Rather, the renewal option will be
viewed independently for purposes of the gains tax.
Gains Tax Regulation 590.5 provides that:
(a)

Q.

Is the creation of a leasehold or sublease a transfer of real property?

A.

Yes. The creation of a leasehold or sublease is a transfer of an interest in real
property, but only where:

1)

the sum of the term of the lease or sublease and any options for renewal
exceeds 49 years, and

2)

substantial capital improvements are or may be made by or for the benefit of
the lessee or sublessee, and

3)

the lease or sublease is for substantially all of the premises constituting the
real property.

"Substantially all" is defined to mean 90% of the total rentable space, exclusive of
common areas.
(b)

Q.

Is the creation of a leasehold for a term of less than 49 years ever taxable?

A.

Yes. If a leasehold is coupled with the granting of an option to purchase the
property, the transfer is taxable regardless of the term of the lease.

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TSB-A-88 (2) R
Real Property Transfer
Gains Tax
July 26, 1988

Accordingly, since the term of the additional renewal option is for less than forty-nine years
and is not coupled with an option to purchase the property, the grant of the additional renewal option
is not subject to the gains tax. However, it should be noted that the term of the additional renewal
option would be aggregated with the terms of any subsequent options to renew or will be coupled
with an option to purchase to determine the application of the Gains Tax.

DATED: July 26, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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