Our building's fee owner needs to convert floors of a Manhattan office tower into condominium units and convey the units occupied by a major tenant to the NYC Industrial Development Agency, so the tenant can get IDA financing benefits, then lease those units back. Do the conveyance to the IDA, the IDA leaseback, the eventual reversion, and a restated/consolidated lease with the tenant trigger New York's Real Estate Transfer Tax or Real Property Transfer Gains Tax?

Plain-English summary

Resnick Water St. Development Co. owned One Seaport Plaza (199 Water Street), a Manhattan office building. Prudential Securities, Inc. (PSI) -- which already occupied roughly half the building and held a 13% equity stake in Development Co. itself -- wanted to extend its lease long-term, and New York City agreed to extend tax and financing benefits through the NYC Industrial Development Agency (IDA) to induce PSI to keep its offices in the city.

To make that happen, Development Co. would convert the building into condominium units (generally one per floor), convey the units PSI occupied to the IDA for no consideration, and the IDA would net-lease those units straight back to Development Co. at nominal rent (the "IDA Conveyance-Leaseback"). Development Co. would then sublease the same space to PSI under a newly Amended and Restated Lease consolidating PSI's existing leases, running about 22 years with renewal options (never exceeding 49 years total) and including a right of first offer on future expansion space and a right of first offer (not an option) if Development Co. ever decided to sell the building. PSI would also enter a sub-sublease directly with the IDA to capture additional financing benefits. The IDA's title to the units would automatically terminate on a set date or earlier triggering events, reverting fee title back to Development Co.

The Department worked through each piece of the structure:

• The IDA conveyance-leaseback itself (transfer to the IDA, the leaseback, and the eventual reversion) is exempt from both RETT and gains tax. Normally the IDA exemption (Gains Tax Reg. § 590.67; Transfer Tax Reg. § 575.11) is framed around the beneficiary of the IDA financing (here, PSI) retaining beneficial ownership. Development Co. wasn't the financing beneficiary -- but the Department extended the same exemption to it because Development Co. itself retained all the benefits and burdens of ownership of the units throughout the conveyance-leaseback cycle, so beneficial ownership never actually shifted to the IDA.
• The Amended and Restated Lease and the IDA sub-sub-sublease to PSI are exempt because each runs under 49 years including renewals and contains no purchase option -- a lease under 49 years is only taxable if coupled with an option to purchase, and here PSI only had a right of first offer, which (unlike an option) can't force an unwilling owner to sell and so doesn't trigger the tax.
• Substantial lease modifications create a new lease for measuring the 49-year threshold (citing the earlier Beakman C. Cannon and Syosset Shopping Center Associates opinions) -- but even treating the consolidated Amended and Restated Lease as a brand-new lease starting in 1993, its term (including renewals, capped short of 49 years by its own terms) still stays under the taxable threshold.

What this means for you

Commercial landlords structuring IDA financing for a tenant, even when the landlord isn't the financing beneficiary

The IDA conveyance-leaseback exemption isn't limited to the beneficiary of the IDA financing. If you're the fee owner conveying title to an IDA purely to enable a tenant's IDA benefits, and you keep every real economic incident of ownership (rent, condemnation/insurance proceeds, right to reconvey, no assumption of IDA-placed mortgages on reversion), the conveyance, leaseback, and reversion are all exempt -- this is one of the origin cases establishing that extension, alongside the parallel Chase Manhattan Bank ruling (TSB-A-93(1)R/93(1.1)R) issued the same month for a similar One New York Plaza structure.

Landlords negotiating tenant rights alongside an IDA restructuring

A right of first offer or right of first refusal on a future building sale does not convert an otherwise-exempt lease into a taxable one -- only an actual purchase OPTION (which can compel an unwilling seller) triggers tax regardless of lease term. Keep this distinction sharp when drafting tenant expansion and building-sale rights alongside an IDA deal.

Accountants and tax professionals

The Real Property Transfer Gains Tax analysis here no longer applies (repealed for transfers on/after June 15, 1996), but the RETT mere-change-of-form and lease/option analysis remains fully current law.

Common questions

Q: Does an IDA financing conveyance trigger transfer tax if the fee owner (not the tenant) is the one conveying title?
A: Not if the fee owner retains all the real benefits and burdens of ownership throughout -- the exemption isn't limited to the actual beneficiary of the IDA financing.

Q: Does a right of first offer or first refusal on a future sale make an otherwise-exempt lease taxable?
A: No. Only a purchase option -- which lets the holder compel an unwilling owner to sell -- triggers tax regardless of lease term; a right of first offer/refusal does not.

Q: Is the Real Property Transfer Gains Tax analysis in this ruling still relevant?
A: No, it was repealed for transfers on or after June 15, 1996. The RETT analysis remains current.

Q: Can I rely on this ruling for my own IDA financing transaction?
A: No. This advisory opinion binds the Department only as to the named petitioners and the specific facts described.

Citations and references

Regulations and prior opinions:

• Section 590.5 of the Gains Tax Regulations (lease/sublease as a transfer; 49-year and 90%-of-premises tests)
• Section 590.30 of the Gains Tax Regulations (right of first refusal is not an option)
• Section 590.67 of the Gains Tax Regulations (IDA project transfers)
• Section 575.7 of the Transfer Tax Regulations (taxable lease/sublease creation)
• Section 575.11 of the Transfer Tax Regulations (examples of taxable/exempt IDA conveyances)
• Beakman C. Cannon Advisory Opinion, TSB-A-88(1)-R (substantial lease modification creates a new lease)
• Syosset Shopping Center Associates Advisory Opinion, TSB-A-87(8)-R (same principle)

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_2r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (2)R
Real Property
Transfer Gains Tax
Real Estate Transfer Tax
January 12, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M921216A

On December 16, 1992, a Petition for Advisory Opinion was received from Resnick Water
St. Development Co., 110 East 59th, Street, New York, New York 10022.
By letter dated December 16, 1992, Prudential Insurance Company of America joined in the
Petition for its additional benefit, the benefit of its affiliate, nominee or assigns should Prudential
become a successor in interest to Resnick Water St. Development Co.
The issues raised by Petitioner, Resnick Water St. Development Co. and Prudential Insurance
Company of America, are:
(1) Whether any aspects of the IDA Conveyance-Leaseback, including, but not limited to,
the conveyance to the IDA of the PSI Units and or any Additional Units conveyed in connection
with the exercise by PSI of any of its Expansion Space Options and reconveyance of all of such
Units (or reversion, as the case may be) to Resnick Water St. Development Co., (the "Development
Co.") its successors and assigns, and the creation of the overlease constitute taxable transfers for
purposes of the New York State Real Property Transfer Gains Tax (the "gains tax") and the New
York State Real Estate Transfer Tax (the "transfer tax").
(2) Whether the creation of (a) the Amended and Restated Lease (which includes the
Expansion Space Options, Right of First Offer and the Building Offer) and (b) the IDA Lease
constitute taxable transfers for purposes of the gains tax or the transfer tax.
The New York City Industrial Development Agency (the "IDA") has agreed to participate
in a financing transaction to induce Prudential Securities, Inc. (formerly known as Prudential-Bache
Securities, Inc.), a Delaware corporation, ("PSI") to retain its offices in New York City.
PSI presently occupies approximately 50% of the total rentable space in 199 Water Street
(also known as One Seaport Plaza) under an existing lease entered into with Development Co., a
New York limited partnership and fee owner of One Seaport Plaza and the RMJ Lease. The existing
lease is dated November 15, 1983 and was amended by four agreements dated November 15, 1983,
by agreement dated May 31, 1984 and by amendments dated May 18, 1984, April 11, 1986, June
5, 1986 and August (no date), 1986 (all, collectively, the "Existing Lease"). The Existing Lease is
scheduled to expire on December 31, 1994. Under Article VI of the Existing Lease, PSI has the
option to extend the term of the Lease to December 31, 2024 by exercising six consecutive five-year
renewal options.

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Under a separate lease (the "RMJ Lease"), Development Co. leased to RMJ Securities Corp.
certain other space in the building (the "RMJ Space"). PSI is the present lessee of the RMJ space as
a result of series of assignments. PSI presently occupies 16 full floors and 1 partial floor of the
building's 34 floors, pursuant to the Existing Lease and the RMJ Lease.
PSI is also a limited partner in Development Co. and has a 13% equity interest and a 15%
interest in Development Co.'s profits and losses.
One Seaport Plaza is presently encumbered by a $195,000,000 mortgage held by The
Prudential Insurance Company of America ("Prudential"), the ultimate parent company of PSI. In
connection with the IDA financing, Prudential and Development Co. will enter into an agreement
modifying the terms and conditions of the Mortgage (the "Amended Mortgage").
The IDA has agreed to participate in the transaction described herein. Pursuant to an
agreement between the City of New York (the "City") and PSI, the IDA's participation will confer
tax benefits to PSI to reduce PSI's cost of operating and maintaining its office in the City, and help
finance the cost of equipment and leasehold improvements necessary for its operations (hereinafter
the "IDA Benefits"). Under the proposed IDA financing arrangement the Existing Lease and the
RMJ Lease will be modified as follow:
(1) PSI will exercise four of its six renewal options extending the expiration date of the
Existing Lease to December 31, 2014. Immediately thereafter, Development Co. and PSI or its
affiliate will amend the Existing Lease to consolidate the RMJ Lease with the Existing Lease and
amend and restate such lease as consolidated, (hereinafter referred to as the "Amended and Restated
Lease"). The Amended and Restated Lease will commence effective January 1, 1993 and shall run
for approximately 22 years, with four mutually exclusive sets of renewal options. Simultaneously
with the execution of the Amended and Restated Lease, PSI may also lease approximately, an
additional 60,000 square feet of space (2 floors). The terms of each renewal option and annual rent
are determined by a formula in the Amended and Restated Lease. In no event, however, will the total
term of the Amended and Restated Lease extend beyond December 21, 2039.
(2) Pursuant to the Amended and Restated Lease, Development Co. will grant to PSI six
options (the "Expansion Space Options) to lease additional full floors in One Seaport Plaza (the
"Expansion Space) among the then available floors. PSI will also receive a right of first offer (the
"Right of First Offer") to lease any space becoming available in the building. The Amended and
Restated Lease will expressly provide that under no circumstances will PSI lease 90% or more of
the total rentable space in One Seaport Plaza even if all options were to be exercised by PSI. In
addition, the Amended and Restated Lease will provide that in no case will any lease entered into
extend the term of the Amended and Restated Lease so that the total period of such lease equals or
exceeds 49 years.

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(3) The Amended and Restated Lease will also provide that Development Co. will grant to
PSI a right of first offer in the event Development Co. decides to sell the building (the "Building
Offer") during the term of the Amended and Restated Lease. The Building Offer does not grant PSI
the right to compel Development Co. to sell the building to PSI or to a party related to PSI.
(4) The parties have also made modifications to the Existing Lease including: (1) several
changes necessary to reflect the creation of the condominium units in the IDA conveyance ­
leaseback transaction and (2) changes in the tax escalation clause.
To accomplish securing the IDA Benefits, the following will take place:
(a) Development Co. will convert One Seaport Plaza into condominium units. Each
floor of the building will comprise a separate condominium unit and separate tax parcel with the
exception of the 22nd floor, which will constitute condominium units, and the garage, retail space
and lobby space in the building, which will constitute two condominium units. All of the
condominium units will be owned initially by Development Co. At the closing of the IDA financing,
Development Co. will convey to the IDA title to the condominium units leased by PSI (the "PSI
Units") under the Amended and Restated Lease. The IDA will take title to the PSI Units subject to
the Amended and Restated Lease and the Amended Mortgage. The deed to the PSI Units and any
additional units ultimately leased to PSI receiving IDA Benefits (the "Additional Units") will either
(i) contain a reversion to Development Co. upon the expiration of, or earlier termination of, the IDA
Lease referred to below or upon certain other events or, (ii) be an estate for 22 years with the
possibility of earlier reversion.
(b) The IDA will then enter into an overlease with Development Co. (the
"Overlease"), pursuant to which the IDA will lease the PSI Units back to Development Co. for a
term co-extensive with the duration of the IDA Benefits (a period of approximately 22 years) at
nominal rent. For purposes of this petition, all steps contemplated by this subparagraph and
subparagraph (a) will be referred to as the "IDA Conveyance-Leaseback."
(c) Development Co. and PSI will consummate the transaction creating the Amended
and Restated Lease.
(d) PSI will enter into a sub-sublease with the IDA for nominal rent, pursuant to
which PSI will sub-sublet the PSI Unit to the IDA.
(e) The IDA will enter into a sub-sub-sublease with PSI and certain of its affiliates,
pursuant to which the IDA will sub-sub-sublet the PSI Units together with certain leasehold
equipment and the leasehold improvements in the PSI Units to PSI and its affiliates (the "IDA
Lease").
(f) PSI and IDA will each enter into financing agreements.

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The Overlease and the Amended and Restated Lease will contemplate the potential
conveyance to the IDA of the Additional Units in connection with the exercise by PSI of its
Expansion Space Options, and will cover such Units upon the conveyance thereof to the IDA.
The Amended and Restated Lease will, among other things, require PSI to pay rent with
respect to the PSI Units. In addition, the IDA-PSI documents will require PSI to make PILOT
payments (payments in lieu of real estate taxes) imposed against the PSI Units. A separate agreement
between Development Co. and the IDA will require Development Co. to make certain payments (the
"Payments") if PSI fails to perform some of its obligations to IDA. Development Co.'s obligations
to make the Payments will be secured by a mortgage from Development Co. to the IDA covering
Development Co.'s interest in the PSI Units (the "IDA Mortgage"). The IDA Mortgage will be
subject and subordinate to the Amended Mortgage. Upon reversion of the PSI Units to Development
Co., Development Co. will not assume or take subject to any mortgages placed on the PSI Units by
the IDA for the benefit of PSI.
In the event that Prudential forecloses on the Amended Mortgage or accepts an assignment
of the Overlease and/or a conveyance in lieu of foreclosure or otherwise acquires Development Co.'s
interest, Prudential, its affiliate, nominee or assigns will also become the tenant under the Overlease
and the sublandlord under the Amended and Restated Lease and may become obligated under the
Overlease to convey Additional Units to the IDA. In addition, Prudential, its affiliate, nominee or
assigns may obtain title to the PSI Units by operation of the reversions. Although PSI is presently
a wholly-owned subsidiary of Prudential it may not be such at the time of such conveyance or
reversion.
The gains tax is a ten percent tax on the gain derived from the transfer of real property, which
includes the transfer or acquisition of a controlling interest in an entity with an interest in real
property, where the real property is located in New York State and where the consideration for the
transfer is $1 million or more.
Section 590.5 of the Gains Tax Regulations provides as follows:
590.5 Lease/sublease as a transfer of real property. [Tax Law, § 1440(7)]
(a) Question: Is the creation of a leasehold or sublease a
transfer of real property?
Answer: 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;

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(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
percent of the total rentable space of the premises, exclusive of
common areas. (See section 590.56 of this Part, relating to an
assignment of a lease.)
For the purpose of determining whether a lease or sublease is for
substantially all of the premises constituting the real property,
premises shall include, but not be limited to the following:
(1) an individual building, except for space which constitutes
an individual condominium or cooperative unit;
(2) an individual condominium or cooperative unit; or
(3) where a lease or sublease is of vacant land only, any
portion of such vacant land.
(b) Question: Is the creation of a leasehold for a term of less
than 49 years ever taxable?
Answer: 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.
Section 590.30 of the Gains Tax Regulations provides as follows:
590.30 Right of first refusal. [Tax Law, S 1440]
Question: Is the term "right of first refusal", contained in a
lease agreement, considered an option?
Answer: No. A right of first refusal grants the recipient the right to buy the
real property at the same price that has been offered to the seller and the seller
accepts or proposes to accept from a third-party buyer. The right of first refusal does
not grant the lessee the ability to compel an unwilling owner of the real property to
sell. In contrast, an option gives the optionee the right to purchase property at an
agreed-upon price from the optionor, if he chooses, at any time within the option
period. The optionee may compel an unwilling option or to convey the real property
upon the exercise of the option.

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Consequently, a lease for less than 49 years containing a right of first refusal is not
a transfer of real property and is not taxable under the gains tax. Accordingly, a
purchase of real property pursuant to the exercise of a right of first refusal is not
exempt under the grandfather exemption. (emphasis added)
Where an existing 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.
Beakman C. Cannon Adv Op Comm T & F, May 29, 1990, TSB-A-88(1)-R; Syosset Shopping
Center Associates Adv Op, Comm T & F, September 14, 1987, TSB-A-87(8)-R. The determination
of what is a substantial modification in an existing lease must he made on a case by case basis. If the
modifications made to an existing lease are determined to be substantial in nature, a new lease is
deemed to he created for gains tax purposes, the term of which would start on the effective date of
such modifications.
Section 590.67(a) of the Gains Tax Regulations provides, in part, as follows:
590.67 Transfers pursuant to industrial development agency projects. [Tax Law, 1440]
(a) Question: How are transfers of interests in real property
to and from an industrial development agency (IDA) treated for
purposes of the gains tax?
Answer: When the company (the beneficiary of an industrial revenue bond
financing) transfers fee title to the real property to the IDA solely for the purpose of
receiving tax-exempt financing, and simultaneously leases such property back, upon
which the company will construct an improvement, the company will be considered
the owner of the project and there will not be a taxable event for gains tax purposes
until the company transfers an interest in the land or building to a party other than the
IDA. This is also true for ground leases/subleases or other similar transactions which
are designed to facilitate industrial revenue bond financings.
Section 575.5 of the Transfer Tax Regulations states as follows:
575.7 Leases and subleases. (Tax Law, §1401(d)(e), (f)) (a) Creation of a
taxable lease or sublease not coupled with an option to purchase. The creation of a
lease or sublease is a conveyance subject to tax only where:
(1) the sum of the term of the lease or sublease and any options for renewal
exceeds 49 years; and

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(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" means ninety percent or more of the total
rentable space of the premises, exclusive of common areas.
For the purpose of determining whether a lease or sublease is for
substantially all of the premises constituting the real property,
premises shall include, but not be limited to the following:
(1) an individual building, except for space which constitutes
an individual condominium or cooperative unit;
(2) an individual condominium or cooperative unit; or
(3) where a lease or sublease is of vacant land only, any
portion of such vacant land.
Moreover, Section 575.11(a) of the Transfer Tax Regulations provides, in part, as follows:
(a) The following are examples of conveyances which are subject to the real estate
transfer tax.
*

*

*

(13)

A conveyance of real property to an industrial development agency (IDA) by
a person who is not the beneficiary of the IDA financing, at the direction of
such beneficiary, with such beneficiary subsequently leasing the property
from the IDA, is subject to tax. In such a conveyance, the beneficiary of the
IDA financing and not the IDA is deemed to be the grantee, and therefore the
exemption described at paragraph (1) of subdivision (c) of section 575.9 of
this Part does not apply.

(14)

A conveyance of real property by an IDA to a person who is not the
beneficiary of the IDA financing where such conveyance is made at the
direction of such beneficiary is subject to tax. In such a conveyance, the
beneficiary of the IDA financing is deemed to be the grantor of the
conveyance.

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Section 575.11(b) of the Transfer Tax Regulations provides as follows:
"(b) The following are examples of conveyances which are not subject to the real
estate transfer tax.
(1) A conveyance of real property by the beneficiary of the industrial development
agency (IDA) financing to the IDA, in connection with the receipt of such financing
is not subject to tax.
(2) A conveyance of real property by the IDA, as grantor, to the beneficiary of the
IDA financing, as grantee is not subject to tax."
With respect to issue "1", the focus of Section 590.67 of the Gains Tax Regulations and
Section 575.11 of the Transfer Tax Regulations is to exclude from gains tax and transfer tax
respectively the transfer of title to real property to an IDA for the purpose of obtaining IDA
financing and the subsequent leaseback to the beneficiary of the financing, where the grantor remains
the beneficial owner of the property. In the instant case, while Development Co. is not the
beneficiary of the IDA financing, the transfer by Development Co. to the IDA of title to the PSI
Units, will not result in a change in beneficial ownership since Development Co. retains all the
benefits and burdens of ownership of the PSI Units. Accordingly, in keeping with the intent of
Section 590.67 of the Gains Tax Regulations and Section 575.11 of the Transfer Tax Regulations,
the transfer of title to the PSI Units by Development Co. to the IDA, the leaseback by the IDA to
Development Co. of the PSI Units and the reconveyance of all such units back to Development Co.,
its successors and assigns will not be subject to either the gains tax or the transfer tax.
Concerning issue "2", pursuant to Section 590.5 of the Gains Tax Regulations and Section
575.7 of the Transfer Tax Regulations the creation of a lease for a term of less than 49 years,
including renewal periods and not coupled with an option to purchase is not a transfer or a
conveyance of real property and, therefore, is not subject to gains tax and transfer tax respectively.
In addition, pursuant to Section 590.30 of the Gains Tax Regulations a lease for a term of less than
49 years containing a right of first refusal is not a transfer of real property and therefore, is not
subject to gains tax. While the Transfer Tax Regulations are silent as to the taxability of a lease
coupled with a right to first refusal, the same policy adopted for gains tax purposes would apply for
transfer tax and, as such, a lease coupled with a right to first refusal is not subject to transfer tax.
Moreover, pursuant to Beakman C. Cannon, supra, and Syosset Shopping Center Associates,
supra, where an existing 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 same
principle would hold true to determine the transfer tax consequences where an existing lease is
modified.

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Accordingly, pursuant to Sections 590.5 and 590.30 of the Gains Tax Regulations, Section
575.7 of the Transfer Tax Regulations, Beakman C. Cannon, supra, and Syosset Shopping Center
Associates, supra, while substantial modifications will be made to the Existing Lease, so that the
consolidation and restatement of the RMJ Lease and the Existing Lease into the Amended and
Restated Lease will constitute a new lease, such Amended and Restated Lease will not be subject
to either the gains tax or the transfer tax since the term of the lease, including renewal periods, is less
than 49 and the lease contains no option to purchase. Further, the IDA Lease will not be subject to
either the gains tax or the transfer tax since the term of the lease is less than 49 years and the lease
contains no options to purchase.

DATED: January 12, 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.