A private company operating an airport cogeneration plant under a Port Authority lease needs to refinance with new bonds. The Port Authority will assign its lease rents to the trustee (exempt, since it's a government instrumentality), and then our company will separately grant a leasehold mortgage and a security interest in our equipment to the same trustee as additional security. Is that additional security exempt too, riding on the Port Authority's exemption?

Plain-English summary

KIAC Partners — a joint venture of subsidiaries of Gas Energy Inc. and Community Energy Alternatives — built and operates an integrated central heating and refrigeration plant, thermal distribution system, and natural gas-fired cogeneration plant at JFK Airport, on premises the Port Authority of New York and New Jersey leases from New York City. The Port Authority originally financed part of the project's construction with $175 million in Special Project Bonds, and by 1996 planned to redeem those and refund up to $75 million of equity investment with up to $250 million in new Series 4 Bonds. As security for the new bonds, the Port Authority would give the bond trustee an "Assignment of Rents" — an assignment of the Port Authority's right to collect KIAC's lease payments — which New York's mortgage recording tax law treats as a mortgage in any city of a million or more people (Tax Law § 250, covering New York City). As a further condition of the bond issuance, KIAC itself would separately grant the trustee a Leasehold Mortgage on KIAC's own leasehold interest in the airport premises, plus a Personal Property Security Interest in KIAC's cogeneration equipment and project documents — both recorded AFTER the Assignment of Rents, and both securing the identical Series 4 Bond debt.

KIAC asked whether these two additional instruments were exempt from mortgage recording tax. The Department said yes, in two steps. First, the Assignment of Rents from the Port Authority to the trustee is itself exempt, because the Port Authority is a bi-state governmental instrumentality with tax immunity independent of Tax Law § 252's general exemption rules (citing the Department's own prior ruling on KIAC's original 1992 financing, TSB-A-92(5)-R, which reached the same conclusion for earlier bonds on this project). Second, because the Leasehold Mortgage and Personal Property Security Interest are recorded after the (exempt) Assignment of Rents, secure the exact same Series 4 Bond principal indebtedness, and simply extend the lien to additional property (KIAC's leasehold interest and equipment) not originally covered by the Assignment of Rents, they satisfy the definition of a "supplemental mortgage" under Tax Law § 255.1(a) — which exempts additional security instruments as long as they don't create or secure new or further indebtedness beyond what the original (already-taxed-or-exempt) primary mortgage secures.

What this means for you

Private operators financing infrastructure on public authority land

If a public authority's own financing instrument (here, an Assignment of Rents) is exempt from mortgage recording tax because of the authority's own tax immunity, additional security you personally grant to the same lender/trustee — recorded afterward, securing the identical debt — can ride on that exemption as a "supplemental mortgage," even though you (the private operator) aren't yourself tax-immune.

Bond counsel structuring project financing on Port Authority or similar authority-controlled sites

The key mechanics: (1) sequence the recordings so the government instrumentality's exempt mortgage-equivalent (like an Assignment of Rents) is recorded FIRST, and (2) make sure any private-party security instruments recorded afterward secure the SAME principal debt without adding new indebtedness. Getting either piece wrong could expose the private party's security instrument to full mortgage recording tax on its own.

Accountants and real estate attorneys

This ruling shows the § 255 supplemental mortgage mechanism working in an unusual direction — not correcting or modifying an existing lien on the SAME property, but extending an exempt lien to entirely different, ADDITIONAL property (a private party's leasehold and personal property) that wasn't covered by the original instrument at all.

Common questions

Q: Is KIAC Partners itself a tax-exempt entity?
A: No. KIAC is an ordinary private partnership. The exemption flows through because its Leasehold Mortgage and Personal Property Security Interest are legally supplemental to the Port Authority's own exempt Assignment of Rents, not because KIAC has any tax immunity of its own.

Q: Does the order of recording matter?
A: Yes. The ruling's conclusion depends on the Leasehold Mortgage and Personal Property Security Interest being recorded AFTER the Assignment of Rents, so they qualify as instruments recorded "subsequent to" a primary mortgage under Tax Law § 255.1(a).

Q: Would this analysis hold if the new instruments secured additional debt beyond the Series 4 Bonds?
A: No. Section 255.1(a)'s supplemental mortgage exemption is expressly limited to instruments that don't create or secure new or further indebtedness beyond the principal debt already secured by the primary (here, exempt) mortgage.

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 could apply to similarly structured public-authority project financings.

Citations and references

Statutes and regulations:

• Tax Law § 253 (mortgage recording tax on real property mortgages)
• 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)
• 20 NYCRR § 644.1(a)(1) (exemption for mortgages held by tax-immune governmental instrumentalities)
• McKinney's Unconsolidated Laws § 6451 (Port Authority created as a bi-state instrumentality)

Case law and prior opinions cited:

• Matter of City of New York v. Tully, 88 A.D.2d 701 (state/instrumentality mortgagee immunity independent of Tax Law § 252)
• KIAC Partners c/o Airport Cogeneration, TSB-A-92(5)-R (Sept. 24, 1992) (prior ruling on KIAC's original bond financing -- the exemption this opinion extends to the refunding)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/mortgage_rec_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/mortgage/a96_3r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (3) R
Mortgage
Recording Taxes
May 9, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M960206A

On February 6, 1996 the Department of Taxation and Finance received a Petition for
Advisory Opinion from KIAC Partners, Energy Center, John F. Kennedy International Airport,
Building 49, New York, New York.
The issue raised by Petitioner, KIAC Partners, is whether a leasehold mortgage and a
personal property security interest 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 are exempt under
Section 255 of the Tax Law from the mortgage recording tax imposed under Section 253 of the Tax
Law.
Petitioner submits the following facts. The Petitioner is a New York general partnership
among (i) Airport Cogen Corp., a special purpose subsidiary of Gas Energy Inc., (ii) Aviation
Funding Corp., a special purpose subsidiary of Gas Energy Inc., and (iii) CEA KIA, Inc., a special
purpose subsidiary of Community Energy Alternatives Incorporated.
Under agreements between Petitioner and The Port Authority of New York and New Jersey
(the "Authority"), Petitioner has constructed and is operating an integrated central heating and
refrigeration plant, thermal distribution system and natural gas-fired cogeneration plant (collectively,
the "Project") at John F. Kennedy International Airport in Queens, New York (the "Airport").
The Authority is a body politic and corporate and an 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 consented to by the Congress of the United
States.
The Project was 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 Project is
included in the premises covered by the City Lease and is intended to serve or be available on a
regular basis for Airport use.
To provide for the financing of a portion of the costs of the construction and renovation of
the Project, on May 4, 1993, the Authority issued $175,000,000 in aggregate principal amount of its
Special Project Bonds, Series 3 (KIAC Partners Project) (the "Series 3 Bonds"). The Series 3 Bonds
were issued by the Authority at Petitioner's request pursuant to the provisions of resolutions adopted
by the Authority. Specifically, on June 9, 1983, the Authority adopted a resolution establishing an
issue of special limited obligations of the Authority known as "Special Project Bonds" (the "Special
Project Bond Resolution"). On June 11, 1992, the Authority adopted resolutions establishing and

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authorizing the issuance of bonds in series (the "Special Project Bond Series Resolutions", and,
together with the Special Project Bond Resolution, the "Resolutions").
To redeem the Series 3 Bonds and to refund up to $75 million of equity investments, which
also financed a portion of the costs of the construction and renovation of the Project, the Authority
plans to issue at KIAC's request up to $250 million in aggregate principal amount at any one time
outstanding of its Special Project Bonds, Series 4 (KIAC Partners Project) (the "Series 4 Bonds").
The Series 4 Bonds will be issued by the Authority pursuant to the Resolutions.
In connection with the issuance, sale and delivery of the Series 4 Bonds, the Authority will
enter into a Trust Indenture (the "Trust Indenture") with a bank or trust company to be appointed by
the Authority as trustee for the holders of the Series 4 Bonds (the "Trustee"). Under the Trust
Indenture, the Authority will give, mortgage, pledge, grant a security interest in and assign to the
Trustee as security for the payment of the Series 4 Bonds, among other items, all right, title and
interest of the Authority in and to certain rentals (the "Facility Rentals"). These rentals are payable
by the Petitioner to the Authority pursuant to an Agreement of Lease between the Authority and
Petitioner, as amended (the "Lease"), providing for the leasing to Petitioner of the Project.
The Series 4 Bonds will not constitute general obligations of the Authority. 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 Series 4 Bonds by the Authority in the
Resolutions and in the Trust Indenture) will be pledged or will be deemed to be pledged in any
manner whatsoever to the payment of debt service on the Series 4 Bonds or for the fulfillment of any
obligation which the Authority may have the right to assume for the benefit of the holders of the
Series 4 Bonds.
The Authority will 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 and the Trustee 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 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 Series 4 Bonds,
the payment of the Series 4 Bonds is to be secured by, among other things, an assignment by
Petitioner of its right, title and interest in and to construction, financing and operational documents
entered into in connection with the Project, as well as other personal property of Petitioner (the
"Personal Property Security Interest"). The Personal Property Security Interest grants a security
interest to the Authority in the personal property owned by Petitioner. The Authority will pledge this
security interest to the Trustee through the Trust Indenture.

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Under the provisions of the Resolutions, as a condition to the issuance of the Series 4 Bonds,
the payment of the Series 4 Bonds is also to be secured by the leasehold mortgage (the "Leasehold
Mortgage"), from Petitioner, as Mortgagor, to the Trustee for the benefit of the holders of the Series
4 Bonds, of KIAC'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 will secure the payment of the total aggregate principal amount of
the Series 4 Bonds in the maximum aggregate amount of $250,000,000 or such lesser amount as may
be outstanding from time to time. It will also secure the interest payable on the Series 4 Bonds and
the amounts which the Authority would be or was obligated by agreements with or for the benefit
of the holders of the Series 4 Bonds to pay or set aside for the amortization, maturity, redemption
(including redemption premiums, if any) or retirement of the Series 4 Bonds, subject to the terms
and provisions of the Leasehold Mortgage and the Lease.
The lien of the Leasehold Mortgage will be imposed upon property not originally covered
by or described in the Assignment of Rents (i.e., all of Petitioner'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 will be recorded in Queens county,
New York, as additional security for the debt secured by the Assignment of Rents by the Authority
to the Trustee to or for the benefit of the holders of the Series 4 Bonds. The Assignment of Rents will
be recorded in Queens, County, New York prior to recordation of the Leasehold Mortgage.
Applicable Law
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 in New
York City pursuant to the authority of Section 253-a of the Tax Law is not different for purposes of
this opinion.
Section 250 of the Tax Law provides, in part, as follows:
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.
The Port Authority was created as "a body politic and corporate, as an instrumentality or
agency of the two states..." (McK. Unconsol. L. §6451).

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Section 252 of the Tax Law provides the general exemptions from the mortgage recording
tax for the recording of certain mortgages. Although Section 252 does not provide an exemption for
the recording of a mortgage given by an instrumentality or agency of this State, the immunity of
public bodies or the State from this tax independent of the statutory exemptions has long been
recognized (see, Matter of City of New York v Tully, 88 AD 2d 701, lv to app den 57 NY2d 606,
20 NYCRR 644.1[a][1]). In KIAC Partners. c/o Airport Cogeneration, (Adv Op St Tx Comm,
September 24, 1992, TSB-A-92[5]-R), which related to earlier bonds issued in connection with the
Project, we concluded that "the mortgage from the Authority to the Trustee ... may be recorded
without payment of tax, because the borrower is an agency of the State."
Section 255.1(a) of the Tax Law provides as follows:
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 other than the principal indebtedness or obligation
secured by or which under any contingency may be secured by the
recorded primary mortgage, in which case, a tax is imposed as
provided by section two hundred fifty-three of this chapter on such
new or further indebtedness or obligation.
Conclusion
The recording of the mortgage given by the Authority to the Trustee in the form of the
Assignment of Rents is exempt from the mortgage recording tax because the Authority is an agency
or instrumentality of New York State.
Also, the Leasehold Mortgage and Personal Property Security Interest constitute
supplemental mortgages within the meaning and intent of Section 255.1(a) of the Tax Law, in
relation to the mortgage given by the Authority to the Trustee, assuming that they are recorded
subsequent to the recording of the mortgage given by the Authority to the Trustee. This is so because
they are given for the purpose of imposing a lien upon property, i.e. the leasehold interest and
personal property of Petitioner, not originally covered by or not described in the recorded primary
mortgage for the purpose of securing principal indebtedness secured by the previously recorded

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primary mortgage. Therefore, the Leasehold Mortgage and Personal Property Security Interest
granted by Petitioner to the Trustee may be recorded without payment of mortgage recording tax.

DATED: May 9, 1996

/s/
Doris S. Bauman
Director
Technical Services Bureau

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