We're building a cogeneration plant at JFK Airport under Port Authority agreements, financed by up to $250 million in Port Authority bonds. The Port Authority will assign its lease rents to the bond trustee (exempt, since it's a government instrumentality), and we'll separately grant the trustee a leasehold mortgage on our own leasehold interest as additional security. Is our leasehold mortgage exempt too, or only the Port Authority's assignment?

Plain-English summary

This is the origin ruling for KIAC Partners' JFK Airport cogeneration project financing, later applied again on a 1998 bond refunding of the same project (TSB-A-96(3)R). KIAC Partners — a joint venture between subsidiaries of Gas Energy Inc. (Brooklyn Union Gas's cogeneration development arm) and Community Energy Alternatives Incorporated (an indirect Public Service Enterprise Group subsidiary) — planned to build and operate a 90-megawatt natural gas-fired cogeneration plant plus a central heating/refrigeration plant and thermal distribution system at JFK Airport, under agreements with the Port Authority of New York and New Jersey, which leases the airport from New York City. To finance construction, the Port Authority planned to issue up to $250 million in Special Project Bonds.

As bond security, the Port Authority would execute an Assignment of Rents to the bond trustee, assigning its right to collect KIAC's lease payments — which Tax Law § 250 deems a "mortgage" for properties in a city of a million or more people (covering New York City). That Assignment of Rents is exempt from mortgage recording tax because the Port Authority is a bi-state governmental instrumentality with tax immunity recognized as a matter of constitutional principle, independent of any statutory exemption (Hotel Waldorf-Astoria Corp. v. State Tax Commission). Separately, as a further condition of the bond financing, KIAC itself would grant the trustee a Leasehold Mortgage on KIAC's own leasehold interest in the airport premises — additional security, but a private-party instrument where "neither borrower nor lender will be an agency of the State."

KIAC asked whether its own Leasehold Mortgage was exempt too. The Department drew a careful two-part distinction. First, it explicitly rejected any theory that KIAC's mortgage inherits the Port Authority's tax immunity directly: even though the tax cost, if imposed, might economically be passed through to the Authority via KIAC's lease payments, "the fact that the tax, if imposed, may be passed on to the Authority is not sufficient grounds to make the mortgage exempt." Second, the Department found a different, narrower path to exemption: because the Leasehold Mortgage is recorded to secure the SAME bond debt already secured by the (exempt) Assignment of Rents, and extends the lien to property (KIAC's leasehold) not covered by the original Assignment, it qualifies as a tax-free "supplemental mortgage" under Tax Law § 255.1(a) — but ONLY if the Assignment of Rents is recorded FIRST. The Department was emphatic on this point: "unless the mortgage to be granted by Petitioner to the Trustee is recorded subsequent to the recording of the assignment of rents there is no supplemental mortgage and no exemption."

What this means for you

Private operators financing infrastructure on Port Authority or similar public-authority land

Don't assume your own security instrument automatically inherits a public authority's tax immunity just because the authority's own financing instrument (like an Assignment of Rents) is exempt, or because the tax cost is contractually passed through to the authority — that argument was expressly rejected here. Instead, the path to exemption runs through § 255's supplemental mortgage mechanism, which has its own strict requirements.

Bond counsel structuring project financing with sequenced security instruments

Recording ORDER is not a technicality here — it's the entire basis for the exemption. If your private-party security instrument is recorded BEFORE the government instrumentality's primary exempt instrument, there is no supplemental mortgage and no exemption, according to this ruling's own emphatic language.

Accountants and real estate attorneys

This ruling and its 1996 follow-up (TSB-A-96(3)R, on the same project's bond refunding) together are the cleanest statement in the corpus of the "private security instrument riding on a government instrumentality's exempt primary mortgage" mechanism — worth reading as a pair for any similar public-authority-adjacent project financing question.

Common questions

Q: Does KIAC's Leasehold Mortgage get exempt simply because the Port Authority's Assignment of Rents is exempt?
A: No -- the Department explicitly rejected that theory, since neither KIAC nor its lender is a state agency. The exemption instead comes from § 255's separate supplemental mortgage rule.

Q: Does the order in which the two instruments are recorded matter?
A: Yes, critically. The Leasehold Mortgage is only exempt if it's recorded AFTER the Assignment of Rents. If recorded first (or if there's no prior exempt primary mortgage at all), there's no supplemental mortgage and the Leasehold Mortgage is fully taxable.

Q: Does passing the tax cost through to the Port Authority contractually create an exemption?
A: No. The Department specifically addressed and rejected this argument -- economic pass-through doesn't create a legal exemption.

Q: Can another airport tenant or Port Authority lessee rely on this specific ruling?
A: No. It binds the Department only as to KIAC and these facts, though the same Assignment of Rents + supplemental leasehold mortgage structure (with correct sequencing) could apply to similarly structured public-authority project financings.

Citations and references

Statutes:

• Tax Law § 253 (mortgage recording tax on real property mortgages)
• Tax Law § 253-a (New York City mortgage recording tax)
• Tax Law § 250 (assignment of rents in a city of 1 million+ population deemed a mortgage)
• Tax Law § 252 (general rule against MRT exemptions arising from other statutes)
• Tax Law § 255.1(a) (supplemental mortgage treatment)
• McKinney's Unconsolidated Laws § 6451 (Port Authority created as a bi-state instrumentality)

Case law cited:

• Hotel Waldorf-Astoria Corp. v. State Tax Commission, 86 A.D.2d 330, lv. denied 58 N.Y.2d 603 (state/instrumentality mortgagee immunity independent of Tax Law § 252)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/mortgage_rec_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/mortgage/a92_5r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92(5)-R
Mortgage
Recording Tax
September 30, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M920810A

On August 10, 1992, a Petition for Advisory Opinion was received from KIAC Partners, c/o
Airport Cogeneration, 166 Montague Street, Brooklyn, New York 11201.
The issue raised by Petitioner, KIAC Partners, is whether a leasehold mortgage to be granted
by Petitioner as a supplemental mortgage to an assignment of rents granted by the Port Authority of
New York and New Jersey is exempt under Section 255 of the Tax Law from the mortgage recording
tax imposed under Section 253 of the Tax Law.
Petitioner is a New York general partnership between Airport Cogen Corp. (a special purpose
subsidiary of Gas Energy Inc., a cogeneration development company of The Brooklyn Union Gas
Company) and CEA KIA, Inc. (a special purpose subsidiary of Community Energy Alternatives
Incorporated, an indirectly owned subsidiary of Public Service Enterprise Group Incorporated).
Under certain agreements with The Port Authority of New York and New Jersey (the
"Authority"), Petitioner will construct and operate a central heating and refrigeration plant, thermal
distribution system and ninety net megawatt natural gas-fired cogeneration plant (the "Cogeneration
Project") at John F. Kennedy International Airport (the "Airport") in Queens, New York.
The Authority is a body corporate and politic and a municipal corporate instrumentality of
the States of New York and New Jersey created and existing by virtue of the Compact of April 30,
1921, made by and between the States of New York and New Jersey and thereafter consented to by
the Congress of the United States.
The Cogeneration Project is to be constructed at the Airport on premises leased to the
Authority by The City of New York (the "City") and operated by the Authority under an "Agreement
with respect to Municipal Air Terminals" between the Authority and the City (the "City Lease"). The
Cogeneration Project will be included in the premises covered by the City Lease and is intended to
serve and be available on a regular basis for Airport use.
To provide in part for the financing and/or refinancing of certain project costs of the
Cogeneration Project, upon request of Petitioner, the Authority would issue up to $250,000,000 in
aggregate principal amount at any one time outstanding of its Special Project Bonds (the "Bonds").
The Bonds would be issued by the Authority pursuant to the provisions of the resolution adopted by
the Authority on June 9, 1983, establishing an issue of special limited obligations of the Authority

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September 30, 1992
known as "Special Project Bonds" (the "Special Project Bond Resolution") and the resolutions
adopted by the Authority on June 11, 1992, establishing and authorizing the issuance of the Bonds
in certain series (the "Special Project Bond Series Resolutions", collectively, with the Special Project
Bond Resolution, the "Resolutions").
In connection with the issuance, sale and delivery of the Bonds, the Authority would enter
into a Trust Indenture with bank or trust company to be appointed by the Authority as trustee for the
holders of the Bonds (the "Trustee").
Under the Trust Indenture, the Authority would give, grant, mortgage, pledge, grant a security
interest in and assign to the Trustee as security for the payment of the Bonds, among other items, all
rights, title and interest of the Authority in and to certain rentals (the "Facility Rental") payable by
Petitioner to the Authority pursuant to an Agreement of Lease (the "Lease") to be entered into by the
Authority and Petitioner providing for the issuance of the Bonds and the leasing to Petitioner of the
Cogeneration Project to be constructed from the proceeds of the Bonds and other available monies.
The Bonds would not constitute general obligations of the Authority and neither the full faith
and credit of the Authority nor any of its revenues, assets or reserve funds (other than as specifically
pledged to the payment of debt service on the Bonds by the Authority in the Resolutions and in the
Trust Indenture) would be pledged or would be deemed to be pledged in any manner whatsoever to
the payment of debt service on the Bonds or for the fulfillment of any obligation which the Authority
would assume to or for the benefit of the holders of the Bonds.
The Authority would execute and deliver to the Trustee an Assignment of Rents (the
"Assignment of Rents"), by and between the Authority and the Trustee, which would confirm the
delivery by the Authority to the Trustee contemporaneously therewith and the receipt by the Trustee
of the Trust Indenture and the trust estate, including the assignment of all right, title and interest of
the Authority in and to the Facility Rental (which would include the accelerated Facility Rental, if
applicable) payable by Petitioner to the Authority pursuant to the Lease, subject, however, to the
provisions of the Trust Indenture, the Lease and the Resolutions.
Under the provisions of the Resolutions, as a condition to the issuance of the Bonds, the
payment of the Bonds is to be secured, inter alia, by the leasehold mortgage (the "Leasehold
Mortgage"), from Petitioner, as Mortgagor, of its right, title and interest in and to its leasehold
interest in the premises under the Lease, to the Trustee for the benefit of the holders of the Bonds,
subject to the terms and provisions of the Leasehold Mortgage and the Lease.
The Leasehold Mortgage would secure the payment of the total aggregate principal amount
of the Bonds in the maximum aggregate amount of $250,000,000 or such lesser amount as may be
outstanding from time to time, together with the interest payable on the Bonds and the amounts
which the Authority was obligated by agreements with or for the benefit of the holders of the Bonds

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to pay or set aside for the amortization, maturity, redemption (including redemption premiums, if
any) or retirement of the Bonds, subject to the terms and provisions of the Leasehold Mortgage and
the Lease.
The Leasehold Mortgage would impose the lien thereof upon property not originally covered
by or described in the Assignment of Rents (i.e., all of the Mortgagor's right, title and interest in and
to its leasehold interest in the premises under the Lease, subject to the terms and provisions of the
Leasehold Mortgage and the Lease). The Leasehold Mortgage would be recorded in Queens County,
New York, as additional security for the debt secured by the mortgages by the Authority to the
Trustee to or for the benefit of the holders of the Bonds, which would be recorded in the form of the
Assignment of Rents in Queens county, New York prior to recordation of the Leasehold Mortgage.
Section 253 of the Tax Law imposes a tax on the recording of a mortgage of real property
in the State measured by the principal debt or obligation, which is, or under any contingency, may
be secured at the date of the execution thereof or at any time thereafter. The tax imposed pursuant
to the authority of Section 253-a of the Tax Law in New York City is not different for purposes of
the opinion.
Although Section 252 of the Tax Law rules out any exemption from taxes given in any other
law, the exemption of public bodies or the State from this tax has always been recognized as a matter
of constitutional principle.
The Port Authority was created as "a body politic and corporate, as an instrumentality or
agency of the two states ... " (McK. Unconsol. L. §6451).
Section 250 of the Tax Law includes the following sentence:
"An assignment of rents to accrue from tenancies, subtenancies, leases or
subleases of real property, within any city in the state having a population of one
million or more, given as security for an indebtedness, shall be deemed a mortgage
of real property for purposes of this article."
By virtue of Section 250 of the Tax Law the mortgage from the Authority to the Trustee, which
includes rental payable to the Authority is a mortgage under Article 11 of the Tax Law. It may be
recorded without payment of the tax, because the borrower is an agency of the State. (Hotel WaldorfAstoria Corp. v. State Tax Comm., 86 AD 2d 330, iv. to app. denied 58 NY 2d 603)
However, this exemption does not extend to the mortgage to be given by Petitioner to the
Trustee, since neither borrower nor lender will be an agency of the State. The fact that the tax, if
imposed, may be passed on to the Authority is not sufficient grounds to make the mortgage exempt.
The other possible grounds for exemption is section 255, subdivision l(a) of the Tax Law, which
provides:

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1. (a) If subsequent to the recording of a mortgage on which all taxes, if any,
   accrued under this article have been paid, a supplemental instrument or mortgage is
   recorded for the purpose of correcting or perfecting any recorded mortgage, or
   pursuant to some provision or covenant therein, or an additional mortgage is recorded
   imposing the lien thereof upon property not originally covered by or not described
   in such recorded primary mortgage for the purpose of securing the principal
   indebtedness which is or under any contingency may be secured by such recorded
   primary mortgage, such additional instrument or mortgage shall not be subject to
   taxation under this article, except as otherwise provided in paragraph (b) of this
   subdivision, unless it creates or secures a new or further indebtedness or obligation
   secured by or which under any contingency may be secured by or which under any
   contingency may be secured by the recorded primary mortgage, in which case, a taxis
   imposed as provided by section two hundred and fifty-three of this chapter on such
   new or further indebtedness or obligation.
   The mortgage to be granted by Petitioner to the Trustee comes within the purview of Section
   255.1(a) of the Tax Law. Therefore, such mortgage can be recorded without payment of the
   mortgage recording tax, provided, the assignment of rents granted by the Authority to the Trustee
   is recorded first. It is important to emphasize that unless the mortgage to be granted by Petitioner to
   the Trustee is recorded subsequent to the recording of the assignment of rents there is no
   supplemental mortgage and no exemption.

DATED: September 30, 1992

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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