We're a securities broker-dealer buying two office buildings for our headquarters. To avoid putting $500 million of real estate and debt on our own balance sheet -- which would reduce our regulatory net capital under broker-dealer rules -- the seller will transfer title directly to a financing trust instead of to us. The trust will fund the purchase with senior notes, junior notes, and investor certificates, then lease the buildings back to us with a purchase option we can exercise anytime. We'll pay all taxes, insurance, and maintenance, keep all appreciation, bear all depreciation risk, and be treated as the owner for income tax purposes (though not on our own books). None of the financing mortgages will be recorded unless our parent company's credit rating drops. Does this financing structure trigger New York's Real Estate Transfer Tax, Real Property Transfer Gains Tax, or Mortgage Recording Tax at any step?

Plain-English summary

Smith Barney, Harris Upham & Co. agreed to acquire two Manhattan office buildings (388 and 390 Greenwich Street) from Shearson Lehman Brothers under an asset purchase agreement, for a total purchase price of $400 million. Rather than take title directly -- which would have put the buildings and their associated debt on Smith Barney's own balance sheet, reducing its regulatory net capital as a securities broker-dealer under applicable regulatory provisions -- Smith Barney arranged for a specially formed Trust to acquire the buildings instead, using up to $500 million in financing ($400 million for the purchase, up to $100 million for improvements Smith Barney would plan and construct).

The financing structure. Before closing, Smith Barney assigned its right to purchase the buildings (for no consideration) to the Trust. At closing, Shearson (at Smith Barney's direction) transferred title directly to the Trust, with the deed explicitly stating it was "solely for the purpose of transferring title to the property and is not intended as a mortgage or a security instrument." The Trust funded the deal through three tiers: senior "A-Notes" (up to $425 million, unsecured -- no mortgage or foreclosure rights -- but backed by an unconditional guarantee from Smith Barney's parent, Smith Barney Holdings, Inc., the "Guarantor"); junior "B-Notes" (up to $60 million, secured by a first mortgage, plus an "SBS Guaranty" from Smith Barney itself as a subordinated backstop); and "Certificates" (up to $15 million, an equity-like investment entitled to a yield equal to whatever's left over after paying the Notes). None of the mortgages, the assignment of Smith Barney's purchase rights, or the Trust declaration itself would be recorded at closing -- they would only be recorded if the Guarantor's credit rating deteriorated below specified thresholds (different trigger levels for the B-Notes versus the Certificates).

The leaseback. Upon the Trust taking title, it leased the buildings to Smith Barney for 5 years, with "rent" set to exactly cover the Notes' interest and the Certificates' yield. Smith Barney also received an option to purchase the buildings at any time (and at lease-end) for an "Option Purchase Price" equal to the outstanding balance of all the financing. Smith Barney bore every real burden of ownership: all property taxes, insurance, maintenance, and indemnification obligations; and captured every real benefit: full entitlement to any appreciation (through the purchase option or excess sale proceeds), full exposure to any depreciation (continuing to service the debt regardless), and treatment as the "owner" for income tax purposes (taking all depreciation and interest deductions), even though for financial-reporting and regulatory-capital purposes it was treated only as a lessee.

Why nothing was taxed. On the Mortgage Recording Tax, the Department found that because none of the financing documents (mortgages, assignment of Smith Barney's purchase rights, assignments of rents, or the Trust declaration) would be recorded at closing -- recording being contingent only on a future credit-rating downgrade -- no recording tax applied at that time (though it would apply later if and when any of those documents actually got recorded). Separately, the deed itself from Shearson to the Trust wasn't a "mortgage" at all under the statutory definition, since it was expressly intended only to transfer title, not to secure a debt or obligation. On the transfer tax and gains tax, although granting a lease coupled with a purchase option is normally itself a taxable conveyance, the Department found Smith Barney was the real beneficial owner of the buildings throughout -- the Trust's role was purely to satisfy Smith Barney's regulatory capital constraints -- so the lease-with-option, and any future exercise of the option, qualified for the mere-change-of-form exemption from both taxes.

What this means for you

Regulated financial institutions (broker-dealers, banks) structuring off-balance-sheet real estate financing

If a financing trust or similar entity takes nominal title purely to satisfy regulatory capital or accounting constraints, and your firm retains every real burden and benefit of ownership (taxes, insurance, maintenance, appreciation upside, depreciation-risk downside, and income-tax "owner" treatment), New York treats the lease-with-purchase-option-back as a tax-exempt mere change of form -- not a fresh taxable conveyance, despite the deal's economic substance being a financing rather than a sale. This is one of the Department's earliest applications of that principle to a synthetic-lease structure (predating the similar NBC/GE ruling, TSB-A-96(5)R, by about three years).

Structured-finance and real estate counsel on mortgage recording tax timing

Recording tax liability turns on whether a security instrument is actually recorded or indexed in the real estate records -- not on whether debt exists or a lien theoretically could attach. Structuring financing documents to stay unrecorded (with recording triggered only by a specified contingency, like a guarantor credit-rating downgrade) can defer or avoid the tax until that contingency actually occurs. Separately, a deed explicitly stated to transfer only title (not security) isn't a "mortgage" at all, regardless of accompanying financing arrangements.

Companies with tiered or layered financing (senior notes, junior notes, equity-like certificates)

This ruling shows the Department analyzing a genuinely complex, multi-tranche financing structure without treating the complexity itself as disqualifying -- the outcome turned entirely on who bore the real economic risks and rewards of the underlying real estate, not on how many layers of debt/equity financed it.

Common questions

Q: Can a regulated financial institution use a financing trust to keep real estate off its own balance sheet without triggering New York transfer tax?
A: Yes, according to this ruling -- if the institution retains all the real economic incidents of ownership (taxes, insurance, maintenance, appreciation, depreciation risk, income-tax ownership treatment) and the trust's role is limited to financing, the Department treats that as a mere change of form with no real change in beneficial ownership.

Q: Does granting a purchase option as part of a lease normally trigger transfer tax, and did it here?
A: Normally yes -- an option to purchase real property is generally treated as a taxable conveyance. But here the option ran from a financing trust back to the party that was already the real beneficial owner, so no change in beneficial ownership actually occurred, and the mere-change exemption applied.

Q: If my financing documents (mortgages, notes) aren't recorded at closing, do I still owe Mortgage Recording Tax?
A: Not until they're actually recorded or indexed in the real estate records. If your structure only requires recording upon a specific triggering event (like a credit downgrade), the tax isn't triggered until that event happens and the documents are actually recorded.

Q: Can another company structuring a similar off-balance-sheet financing rely on this exact analysis?
A: No. This is an advisory opinion binding the Department only as to Smith Barney, Harris Upham & Co. and the specific facts described -- particularly the extensive documentation that Smith Barney bore every real burden and benefit of ownership. Different allocations of risk or benefit could change the outcome.

Citations and references

Statutes and regulations:

• Sections 253, 253-a of the Tax Law (Mortgage Recording Tax, state and NYC)
• Section 250.2 of the Tax Law (definition of "mortgage")
• Section 1401(e) of the Tax Law (definition of "conveyance")
• Section 1401(f) of the Tax Law (definition of "interest in real property")
• Section 1402 of the Tax Law (RETT on conveyances over $500 consideration)
• Section 1405(b)(6) of the Tax Law (mere-change-of-form exemption)
• Section 1440.4 of the Tax Law (gains tax definition of "interest")
• Section 1440.7 of the Tax Law (gains tax definition of "transfer of real property")
• Section 1441 of the Tax Law (gains tax on transfers of $1 million+; repealed by Chapter 309 of the Laws of 1996 for transfers on/after June 15, 1996)
• Section 1443.1, 1443(5) of the Tax Law; 20 NYCRR 590.1 (gains tax threshold and mere-change-of-form exemption)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a93_14r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (14) R
Real Property Transfer
Gains Tax
Real Estate Transfer Tax
Mortgage Recording Taxes
July 26, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M930525A

On May 25, 1993, a Petition for Advisory Opinion was received from Smith Barney, Harris
Upham & Co., 1345 Avenue of the Americas, New York, New York 10105.
The issues raised by Petitioner, Smith Barney, Harris Upham & Co., are:
1.

Whether the up to $500 million required to finance the acquisition and improvement
of two buildings situated at 388 and 390 Greenwich Street, New York, New York
(hereinafter the "Buildings") in the form of A-Notes in the principal amount of up to
$425 million, B-Notes in the principal amount of up to $60 million, and Certificates
in the principal amount of up to $15 million either collectively or individually will
be subject to New York State and New York City Mortgage Recording Taxes
(hereinafter the "mortgage recording taxes").

2.

Whether the granting by a trust entity (the "Trust") of a lease to Petitioner with an
option to purchase the Buildings or the subsequent transfer of the Buildings to
Petitioner upon the exercise of the option will be subject to New York State Real
Estate Transfer Tax (hereinafter the "transfer tax").

3.

Whether the granting by the Trust of a lease to Petitioner with an option to purchase
the Buildings or the subsequent transfer of the Buildings to Petitioner upon the
exercise of the option will be subject to New York State Real Property Transfer
Gains Tax (the "gains tax").

Petitioner has agreed to acquire the Buildings pursuant to an asset purchase agreement dated
as of March 12, 1993, to which Petitioner, as buyer, and Shearson Lehman Brothers, Inc. (hereinafter
"Shearson"), as seller, along with certain of their affiliates are parties (the "Asset Purchase
Agreement"). The acquisition and improvement of the Buildings will be financed through a Trust
which will provide all of the financing.
Prior to consummation of the Asset Purchase Agreement, Petitioner will assign, for no
consideration, its right to purchase the Buildings to the Trust. The instrument which effectuates the
assignment will not be recorded. Upon consummation, Shearson at the direction of Petitioner will
transfer title to the Buildings to the Trust. The total purchase price for the Buildings will be $400
million (or such other amount as an appraisal determines is properly attributable to the Buildings),
which will be paid in cash to Shearson at the time of closing. The Buildings will be occupied by
Petitioner and certain of its affiliates as tenants-in-common, although a portion of one Building will
continue to be occupied by Shearson for approximately one year after the closing.

-2­
TSB-A-93 (14) R
Real Property Transfer
Gains Tax
Real Estate Transfer Tax
Mortgage Recording Taxes
July 26, 1993
The deed between Shearson and the Trust will state that "[T]his deed is solely for the purpose
of transferring title to the property and is not intended as a mortgage or a security instrument."
The Trust will obtain financing to purchase the Buildings through third parties. The total
amount of the financing will be up to $500 million, of which up to $400 million will be used to
purchase the Buildings, and up to $100 million will be used for improvements. These improvements
will be planned and constructed by Petitioner or its designees, under the control and supervision of
Petitioner, and Petitioner will be liable if the cost of the improvements exceeds the $100 million of
financing allocated for improvements.
Of the up to $500 million required to finance the acquisition and improvements of the
Buildings, $485 million will consist of loans from third party lenders to the Trust. The remaining $15
million will be in the form of an investment in the Trust. The parties making the investment (the
"Certificate Holders") will receive a yield equal to the excess of the proceeds from any payments
made to the Trust by Petitioner under the lease over the amount paid to the third party lenders. The
Declaration of Trust provides that in the event of a default, the Buildings will be sold, and any
amounts owing under the Certificates will be repaid from the proceeds. In addition, the Certificate
Holders will receive a junior mortgage in the Buildings, and under certain circumstances, an
assignment of rents. Neither the mortgage, the assignment of rents nor the Declaration of Trust will
be recorded. The Certificate Holders will be entitled to record their mortgage and assignment of rents
upon a deterioration in the credit rating of Smith Barney Holdings, Inc. (the "Guarantor"), the parent
corporation of Petitioner, or Petitioner.
The $485 million in loans will be divided into two classes. The first class, consisting of up
to $60 million, will be secured by a mortgage (the "B-Notes"). The holders of the B-Notes will
receive a first mortgage on the property and, under certain circumstances, an assignment of rents.
The B-Note holders will not record either the mortgage or the assignment of rents, although they will
be entitled to do so upon a deterioration in the credit rating of the Guarantor or Petitioner. The
amount by which the Guarantor's credit rating can fall before the holders of the B-Notes are entitled
to record their mortgage and assignment of rents is less than the amount by which such credit rating
can fall before the Certificate Holders can record their mortgage and assignment of rents.
In the event of a default, the holders of the B-Notes will receive a payment made by
Petitioner to the Trust. This payment (the "SBS Guaranty") will be an irrevocable, subordinated
obligation of Petitioner to pay the Trust the outstanding balance of the B-Notes plus any accrued and
unpaid interest and costs (the "Outstanding Balance"). Furthermore, the Buildings will be sold and
the proceeds of the sale will be distributed, in turn, to the holders of the B-Notes (if there is any
Outstanding Balance) and the Certificates to the extent of their investment plus any accrued yield
and costs; any proceeds remaining after payment of the B-Notes and the Certificates will be paid to

-3­
TSB-A-93 (14) R
Real Property Transfer
Gains Tax
Real Estate Transfer Tax
Mortgage Recording Taxes
July 26, 1993
Petitioner where such proceeds will be commingled with Petitioner's general funds and available to
all creditors of Petitioner.
The second class of notes (the "A-Notes") will have a principal amount of up to $425 million.
The holders of the A-Notes will have neither a mortgage nor any other security interest in the
Buildings. Consequently, in the event of default, the A-Note holders will have no right to foreclose
upon the Buildings and no right to share in any proceeds of a foreclosure sale. Rather, upon default,
the A-Note holders will have only the right to collect under the Instrument Guaranty, which will be
an unconditional promise by the Guarantor to pay the outstanding principal amount of the A-Notes
plus any accrued and unpaid interest and costs. Both the A-Notes and the B-Notes will mature in five
years.
Upon the transfer of title of the Buildings from Shearson to the Trust, the Trust will lease the
Buildings to Petitioner for a period of five years. The "rent" paid by Petitioner will be an amount
sufficient to pay the interest on the A-Notes and B-Notes and to pay a current yield to the Certificate
Holders.
In addition to the payment of rent, Petitioner will be required to pay all real and personal
property taxes, as well as any assessments, levies or fees associated with the ownership, use or
financing of the Buildings. The "lease" gives Petitioner the right to, at its own expense, contest the
amount of the taxes assessed on the property. Petitioner also will be responsible for managing and
maintaining insurance on the property. Petitioner must indemnify the Trust and the A-Note, B-Note
and Certificate Holders from any liabilities associated with the Buildings. Also, the consent of
Petitioner is necessary for the Trust to encumber the Buildings.
In the event of condemnation of, or casualty that renders the Buildings unsuitable for use, any
award, compensation or insurance payment to which Petitioner becomes entitled will be assigned
to the Trust for the benefit of Petitioner. In addition, if Petitioner does not exercise its option to
purchase the Buildings, the Guarantor will be required to pay the Trust the Guarantor Termination
Value, which will equal the outstanding balance on the A-Notes plus any accrued and unpaid interest
and costs. Additionally, Petitioner will be required to pay the SBS Termination Value, which will
equal the outstanding balance of the B-Notes, plus interest and costs, to the Trust. Also, the Trust
will be required to sell the property. Petitioner will be entitled to any excess sale proceeds (after
payment of any outstanding notes and Certificates and other costs of the Trust) from the sale. In the
event of a casualty that does not render the Buildings unsuitable for use, Petitioner will be required
to rebuild, replace or repair any damage to restore the property to the value and operating condition
immediately prior to the casualty or condemnation. In this case, Petitioner will be responsible for all
costs and expenses; however, the Trust will be required to dispense funds to Petitioner from the
award, compensation or insurance payment. Petitioner will be solely liable if the costs and expenses
it incurs exceed the amounts received from the Trust, and will be entitled to any excess proceeds.

-4­
TSB-A-93 (14) R
Real Property Transfer
Gains Tax
Real Estate Transfer Tax
Mortgage Recording Taxes
July 26, 1993
If there is an event of default under the lease, the A-Note holders will be paid pursuant to the
Instrument Guaranty, and the holders of the B-Notes will be paid pursuant to the SBS Guaranty. The
Trust then will sell the Buildings with the net proceeds from the sale to be distributed first to the
Certificate Holders (to the extent of their outstanding investment plus any yield which has accrued
but has not been paid and costs) and the remainder to be returned to Petitioner.
In conjunction with the lease, Petitioner will acquire an option to purchase the Buildings.
Petitioner will have the right to exercise the option at any time during the term of the lease. The
option price will equal the outstanding balance of the A-Notes, B-Notes, Certificates and any accrued
interest or costs thereon (the "Option Purchase Price"). Petitioner also will have the right to exercise
the option at the end of the lease term.
The 'terms of the lease between Petitioner and the Trust require that Petitioner assume the
responsibilities of an owner by burdening Petitioner with the duty to pay the tax, maintenance, repair,
insurance expense and other costs associated with ownership of the Buildings. Furthermore,
Petitioner is the only party that can benefit from any appreciation in the value of the Buildings. This
is true because even if the option is not exercised, Petitioner will receive all of the proceeds from a
sale of the Buildings over the amount necessary to repay the loans. Conversely, if the value of the
Buildings depreciates, Petitioner nevertheless will be required to service the debt through the "rent"
and repay the principal amount through exercising its option or through a payment by the Guarantor
on Petitioner's behalf under the Instrument Guaranty.
By using the structure described herein to finance the Buildings, the Buildings and the debt
associated with the Buildings will not appear on Petitioner's balance sheet. If the Buildings and such
debt were on Petitioner's books, under regulatory provisions governing Petitioner's status as a broker­
dealer, Petitioner's capital would be considered to be reduced by the amount of the Buildings which
are non-monetary assets, which in turn would impair Petitioner's ability to conduct its business.
Thus, for financial purposes, Petitioner will be treated as a lessee, not as the owner, of the Buildings.
However, for income tax purposes, Petitioner will be treated as the owner of the Buildings and will
take all depreciation and deductions associated with the ownership of the Buildings. Also, Petitioner
will deduct the interest costs associated with the financing arrangement and will take no deduction
for payments made as "rent".
Petitioner has represented that the aforesaid facts are reflected in the documents executed by
the parties and furnished as part of the Petition for Advisory Opinion.
Subdivisions 1, 1-a and 2 of Section 253 of the Tax Law impose taxes 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.

-5­
TSB-A-93 (14) R
Real Property Transfer
Gains Tax
Real Estate Transfer Tax
Mortgage Recording Taxes
July 26, 1993
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 this opinion.
Section 250.2 of the Tax Law defines the term "mortgage" as follows:

2. The term "mortgage" as used in this article includes every
   mortgage or deed of trust which imposes a lien on or affects the title
   to real property, notwithstanding that such property may form a part
   of the security for the debt or debts secured thereby. 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.
   Executory contracts for the sale of real property under which the
   vendee has or is entitled to possession shall be deemed to be
   mortgages for purposes of this article and shall be taxable at the
   amount unpaid on such contracts. A contract or agreement by which
   the indebtedness secured by any mortgage is increased or added to,
   shall be deemed a mortgage of real property for purposes of this
   article, and shall be taxable as such upon the amount of such increase
   or addition...
   In accordance with Section 1402 of the Tax Law, a transfer tax is imposed on each
   conveyance of real property or interest therein when the consideration for the conveyance exceeds
   five hundred dollars.
   Section 1401 of the Tax Law provides, in part, as follows:
   *

*

*

(e) "Conveyance" means the transfer or transfers of any
interest in real property by any method, including but not limited to
sale, exchange, assignment, surrender, mortgage foreclosure, transfer
in lieu of foreclosure, option, trust indenture, taking by eminent
domain, conveyance upon liquidation or by a receiver, or transfer or
acquisition of a controlling interest in any entity with an interest in
real property. Transfer of an interest in real property shall include the
creation of a leasehold or sublease only where (i) the sum of the term
of the lease or sublease and any options for renewal exceeds forty­
nine years, (ii) substantial capital improvements are or may be by or
for the benefit of the lessee or sublessee, and (iii) the lease or sublease
is for substantially all of the premises constituting the real property...

-6­
TSB-A-93 (14) R
Real Property Transfer
Gains Tax
Real Estate Transfer Tax
Mortgage Recording Taxes
July 26, 1993
(f) "Interest in the real property" includes title in fee, a
leasehold interest, a beneficial interest, an encumbrance, development
rights, air space and air rights, or any other interest with the right to
use or occupancy of real property or the right to receive rents, profits
or other income derived from real property. It shall also include an
option or contract to purchase real property. It shall not include a right
of first refusal to purchase real property.
Section 1405(b) of the Tax Law provides, in pertinent part, as follows:
(b) The tax shall not apply to the following conveyances:
*

*

*

6. Conveyances to effectuate a mere change of identity or
   form of ownership or organization where there is no change in
   beneficial ownership, other than conveyances to a cooperative
   housing corporation of the real property comprising the corporative
   dwellings or dwellings...
   Pursuant to Sections 1441 and 1443.1 of the Tax Law and Section 590.1 of the Gains Tax
   Regulations the gains tax is a ten percent tax on the gain derived from the transfer of real property,
   which includes the acquisition or transfer of a controlling interest in any entity with an interest in real
   property, where the property is located in New York State and where the consideration for the
   transfer is one million dollars or more.
   Section 1440 of the Tax Law provides, in pertinent part, as follows:
   *

*

*

4. "Interest" when used in connection with real property
   includes, but is not limited to, title in fee, a leasehold interest, a
   beneficial interest, an encumbrance, a transfer of development rights
   or any other interest with the right to use or occupancy of real
   property or the right to receive rents, profits or other income derived
   from real property. Interest shall also include an option or contract to
   purchase real property.
   *

*

*

7. "Transfer of real property" means the transfer or transfers
   of any interest in real property by any method, including but not
   limited to sales, exchange, assignment, surrender, mortgage
   foreclosure, transfer in lieu of foreclosure, option, trust indenture,
   taking by eminent domain, conveyance upon liquidation or by a

-7­
TSB-A-93 (14) R
Real Property Transfer
Gains Tax
Real Estate Transfer Tax
Mortgage Recording Taxes
July 26, 1993
receiver, or transfer or acquisition of a controlling interest in any
entity with an interest in real property. Transfer of an interest in real
property shall include the creation of a leasehold or sublease only
where (i) the sum of the term of the lease or sublease and any options
for renewal exceeds forty-nine years, (ii) substantial capital
improvements are or may be made by or for the benefit of the lessee
or sublessee, and (iii) the lease or sublease is for substantially all of
the premises constituting the real property...
Section 1443 of the Tax Law provides, in pertinent part, as follows:
Sec. 1443. Exemptions.-- A total or partial exemption shall be allowed in the
following cases:
*

*

*

5. If a transfer of real property, however effected, consists of
   a mere change of identity or form of ownership or organization,
   where there is no change in beneficial interest.
   With respect to issue "1", pursuant to Sections 253 and 253-a of the Tax Law, respectively,
   mortgage recording taxes are imposed on the recording of any mortgage of real property situated
   within New York State and New York City. Petitioner states that the mortgages, assignment of
   contract by Petitioner to the Trust, assignment of rents granted to the Certificate Holders and the BNote Holders and the Declaration of Trust will not be recorded at the time the transaction is
   consummated, although the mortgages and assignment of rents are to be recorded upon a
   deterioration in the credit rating of the Guarantor. Accordingly, since the mortgages, assignment of
   contract by Petitioner to the Trust, assignment of rents, and Declaration of Trust will not be recorded
   the mortgages, assignment of rents, and Declaration of Trust will not be subject to the mortgage
   recording taxes at this time. It is noted, however, that if the mortgages given to the Certificate
   Holders or the B-Note Holders, the assignment of contract by Petitioner to the Trust, the assignment
   of rents or the Declaration of Trust are recorded at a subsequent time, such mortgages, assignment
   of contract by Petitioner to the Trust, assignment of rents or Declaration of Trust, as the case may
   be, will then be subject to the mortgage recording taxes at the time of recording.
   Moreover, pursuant to Section 250.2 of the Tax Law, the term "mortgage" is defined to be
   a mortgage or deed of trust which imposes a lien on or affects the title to real property,
   notwithstanding that such property may form a part of the security for the debt or debts secured
   thereby. The deed to be recorded between Shearson and the Trust is stated to be solely for the
   purpose of transferring title to the property and is not intended as a mortgage or a security interest.

-8­
TSB-A-93 (14) R
Real Property Transfer
Gains Tax
Real Estate Transfer Tax
Mortgage Recording Taxes
July 26, 1993
Therefore, since the recording of the deed is not intended to secure the payment of money or the
performance of an obligation, such deed does not rise to the level of a mortgage and its recording
is not subject to the mortgage recording taxes.
Concerning issues "2" and "3", pursuant to Sections 1401 and 1402 of the Tax Law
pertaining to the transfer tax and Sections 1440, 1441 and 1443.1 of the Tax Law and Section 590.1
of the Gains Tax Regulations the granting of an option to purchase real property with the right to use
or occupancy of real property is a conveyance and transfer of real property subject to the transfer tax
and the gains tax. In addition, the subsequent conveyance or transfer of real property in connection
with the exercise of the option to purchase real property is a conveyance and transfer of real property
subject to the transfer tax and the gains tax. However, Sections 1405(b)(6) and 1443.5 of the Tax
Law, respectively, provide exemption from the transfer tax and the gains tax where the transfer of
real property consists of a mere change of identity or form of ownership or organization where there
is no change in beneficial interest.
In the instant case, for purposes of satisfying certain regulatory provisions governing
Petitioner, Shearson at the direction of Petitioner will transfer the Buildings to the Trust.
Simultaneously with such transfer, the Trust will grant a lease to Petitioner with an option to
purchase the Buildings. For financial purposes Petitioner will be treated as a lessee, and not the
owner of the Buildings. However, for income tax purposes Petitioner will be treated as the owner
of the Buildings and will take all depreciation and deductions associated with the ownership of the
Buildings. Also, Petitioner will deduct the interest costs associated with the financing arrangement
and will take no deduction for payments made as "rent". In addition, Petitioner assumes all burdens
of ownership with the duty to pay the tax, maintenance, repair, insurance expense and other costs
associated with ownership of the Buildings. Furthermore, in the event of condemnation of, or
casualty that renders the Buildings unsuitable for use, any award, compensation or insurance
payment to which Petitioner becomes entitled will be assigned to the Trust for the benefit of
Petitioner. Also, Petitioner is the only party that can benefit from any appreciation in the value of the
Buildings, and will bear the economic burden should the Buildings depreciate. Moreover, the consent
of Petitioner is necessary for the Trust to encumber the Buildings.
Accordingly, it is recognized that for tax purposes at all times from the conveyance of title
from Shearson to the Trust that Petitioner is the beneficial owner of the Buildings. The transaction
as described is being done solely to satisfy certain restrictive regulatory provisions governing
Petitioner. Thus, the granting of the lease by the Trust to Petitioner coupled with the granting of

-9­
TSB-A-93 (14) R
Real Property Transfer
Gains Tax
Real Estate Transfer Tax
Mortgage Recording Taxes
July 26, 1993
an option to purchase and the subsequent transfer of the Buildings by the Trust to Petitioner upon
exercise of the option will not be subject to the transfer tax and the gains tax since the transfers
consist of a mere change of identity or form of ownership or organization and will not result in a
change in beneficial interest in the real property.

DATED: July 26, 1993

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

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