We're a not-for-profit educational organization leasing 23% of a Manhattan office building. To help us qualify for a real property tax exemption on our space -- which requires the space's OWNER (not just its user) to be tax-exempt -- our landlord has agreed to convey us bare legal title to just the air envelope enclosing our leased space, as a fee simple determinable that automatically reverts to the landlord when our lease ends. The landlord keeps every economic benefit: all our rent, all mortgage financing rights and proceeds, condemnation proceeds, and tax ownership treatment; we get no rights to encumber the space, no condemnation claim, and no relief from our lease obligations. No money changes hands. Does this 'raw title' transfer trigger New York's Real Estate Transfer Tax?

Plain-English summary

American Management Association ("Petitioner"), a not-for-profit educational entity chartered by the New York Board of Regents, leased approximately 178,944 square feet (23% of the rentable space) in the office portion of a multi-use building at 1601 Broadway in New York City -- owned by Broadway 48th-49th Street Associates ("Broadway") -- for student instruction and administrative functions. To reduce Petitioner's occupancy costs, Petitioner worked with the New York City Economic Development Corporation to explore a real property tax exemption, which required satisfying a three-part test: (1) the USER of the property must be tax-exempt, (2) the nature of the USE must be exempt, and (3) the OWNER of the property must be tax-exempt. Petitioner met the first two prongs but, as a mere tenant (not an owner), couldn't satisfy the third -- so during lease negotiations, Broadway agreed to help by conveying Petitioner bare legal title to just the "air envelope" enclosing Petitioner's leased space.

The structure: title without economics. The conveyance would be by deed, covering only the volume of space Petitioner occupies, and the estate conveyed would be a "fee simple determinable" (an estate on limitation) existing only as long as Petitioner's lease with Broadway remained in effect -- title would automatically revert to Broadway upon the lease's expiration or any earlier termination. The deed would explicitly provide for NO merger of the leasehold and fee estates, and the conveyance would remain subject to all existing title exceptions, ground leases, and present/future mortgages. No monetary consideration would be paid, and Petitioner contended no economic interest was actually being conveyed: Broadway would retain the right to receive all rent and other Lease income, would continue to be treated as owner of the premises for federal, state, and local income tax purposes, and (per the Lease's terms) would not share in any real property tax savings resulting from Petitioner's exempt status -- those savings would instead be credited against Petitioner's rent.

Multiple additional facts reinforced that Broadway retained every real incident of ownership: Broadway could freely increase the existing roughly $165 million consolidated Building mortgage or add new mortgages and keep all financing proceeds, with Petitioner bearing zero obligation on any such debt (backstopped by a non-disturbance agreement protecting Petitioner's possession through any foreclosure); Petitioner's title would be forfeited entirely if Broadway went bankrupt or defaulted on its mortgage, with Petitioner having no right to cure such a default; condemnation proceeds would go to Broadway, with Petitioner limited to compensation for fixtures/relocation expenses only (and only if that didn't reduce Broadway's award); and Petitioner had no authority to encumber the space without Broadway's express written consent.

Why it's exempt. The Department held this conveyance of raw title is exempt from the real estate transfer tax under Section 1405(b)(6) as a mere change of identity or form of ownership, because Broadway -- the grantor -- would continue to possess exactly the same economic and beneficial ownership interest in the space after the conveyance as before. The Department pointed to eight specific facts supporting this conclusion: the deed's non-merger language, Broadway's retained right to all rent, Broadway's retained mortgage rights, the non-disturbance agreement, Broadway's continued income-tax ownership treatment, the condemnation-proceeds allocation, Petitioner's inability to encumber the premises, and the automatic reverter of title to Broadway at lease expiration or termination. This tracked the Department's established treatment of similar "title-only" conveyances used to facilitate Industrial Development Agency (IDA) financing, where a grantor's conveyance of title to an IDA (while retaining all benefits and burdens of ownership) likewise doesn't change beneficial ownership (Resnick Water St. Development Co., TSB-A-93(2)R; Midtown Realty Company, TSB-A-93(18)R).

What this means for you

A landlord can convey bare legal title to a nonprofit tenant, purely to help the tenant satisfy an "exempt owner" test, without triggering transfer tax -- if the landlord keeps every economic string attached

If you're structuring a title transfer solely to satisfy an ownership-based tax exemption test (rather than as a genuine economic sale), preserving the grantor's rights to rent, mortgage proceeds, condemnation awards, income-tax ownership treatment, and an automatic reverter at lease-end are all factors that support treating the transfer as a tax-free mere change of form.

Real property tax exemption eligibility and real ESTATE TRANSFER tax liability are two entirely separate questions

This ruling explicitly notes that whether the real property tax exemption itself would actually apply is outside the Department's authority to address in an advisory opinion -- getting a favorable RETT ruling on the title transfer doesn't guarantee the underlying property tax exemption will be granted; that's a separate determination.

A "fee simple determinable" that automatically reverts on lease termination is a recognized, low-risk vehicle for facilitating this kind of arrangement

Structuring the conveyed estate to exist only for the lease term, with automatic reverter (rather than requiring a separate reconveyance) and explicit non-merger language preserving the underlying leasehold, are the specific legal mechanics the Department relied on to confirm no real change in beneficial ownership occurred.

No money needs to change hands for the mere-change-of-form exemption to require close analysis -- but zero consideration here reinforced the "no real economics moved" conclusion

While the exemption doesn't require zero consideration in every case, the absence of any payment here, combined with the landlord's retention of every other ownership incident, made this a particularly clean case for the exemption to apply.

Common questions

Q: Can a commercial landlord transfer bare title to a nonprofit tenant's leased space, just to help the tenant qualify for a property tax exemption, without paying transfer tax?
A: Yes, if the landlord retains all the real economic benefits and burdens of ownership (rent, mortgage rights, condemnation proceeds, income-tax treatment) and the conveyed title automatically reverts to the landlord when the lease ends -- that structure qualifies as a mere change of form, not a taxable conveyance.

Q: Does getting a favorable Real Estate Transfer Tax ruling on this kind of title transfer guarantee the underlying property tax exemption will be approved?
A: No -- whether the property tax exemption itself applies is a separate question outside the Department's authority to rule on in this context; a taxpayer still needs to separately establish that exemption.

Q: Is this kind of "raw title" transfer similar to arrangements used for other tax-advantaged financing, like Industrial Development Agency deals?
A: Yes -- the Department applied the same reasoning used in IDA-financing title transfers, where a grantor conveys title to a financing intermediary while retaining all the benefits and burdens of ownership, resulting in no change in beneficial ownership.

Citations and references

Statutes, guidance, and case law:

• Section 1402 of the Tax Law
• Section 1405(b)(6) of the Tax Law
• Resnick Water St. Development Co., Adv Op Comm T&F, January 12, 1993, TSB-A-93(2)R
• Midtown Realty Company, Adv Op Comm T&F, October 28, 1993, TSB-A-93(18)R

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a97_6r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(6)R
Real Estate Transfer Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M970214C

On February 14, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from American Management Association, 1601
Broadway, New York, New York.
Petitioner submitted additional information
pertaining to the petition on March 12, 1997 and April 30, 1997.
The issue raised by Petitioner, American Management Association, is whether
Real Estate Transfer Tax imposed by Article 31 of the Tax Law (the "transfer
tax") would be imposed with respect to the transaction described herein.
Petitioner submits the following facts as the basis for this Advisory
Opinion. Petitioner is a not-for-profit educational entity chartered by the New
York Board of Regents. Petitioner has leased from Broadway 48th-49th Street
Associates ("Broadway") approximately 178,944 square feet of space in the office
portion of a multi-use building located at 1601 Broadway in New York City (the
"Building"). Petitioner’s space constitutes 23% of the rentable square feet of
the Building. The balance of the Building is a hotel with some retail uses on
the ground level. Petitioner uses its space for student instruction and for
administrative functions in support of its educational programs.
It has been determined that in order to keep Petitioner's educational
programs in New York current occupancy costs must be reduced. Discussions have
been held with the New York City Economic Development Corporation ("EDC") to
formulate options to achieve such relief. EDC suggested that if real property
tax exemption could be obtained, with the savings passed to Petitioner, the goal
of reducing Petitioner's occupancy costs to the appropriate level could be met.
(It is noted that the question of whether the real property tax applies is
outside the province of this Department; the opinion only addresses the real
estate transfer tax consequences of the described transaction.)
Petitioner indicates that to obtain the real property tax exemption the
following three-part test must be met:
(1) the user of the real property must be exempt from real property tax;
(2) the nature of the use must be exempt; and
(3) the owner of the real property must be exempt.
Petitioner states that it meets the first two requirements, but absent a transfer
of title to Petitioner, the third requirement would not be satisfied. During
lease negotiations, Broadway agreed to help Petitioner meet the third
requirement. Therefore, a plan has been devised under which
Broadway would
transfer to Petitioner the space now leased to Petitioner by Broadway. Under
this plan, Broadway would convey title of the air envelope enclosing the space

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that Petitioner currently occupies to Petitioner. The value of the proposed
transaction to Broadway is that if real property tax exemption can be obtained
by Petitioner, Petitioner becomes a more viable tenant as a result of its reduced
occupancy expenses.
The conveyance would be by deed. The deed would convey only the volume of
space enclosing the area occupied by Petitioner. The estate conveyed would exist
only for so long as the lease between Petitioner and Broadway (the "Lease")
remains in effect.
Title of the estate which would be the subject of the
conveyance will revert automatically to Broadway at the expiration of the Lease,
or at any earlier termination.
The estate to be conveyed is fee simple determinable, or estate on
limitation. The conveyance will be subject to all existing title exceptions,
ground leases, present and future mortgages, and the existing Lease between
Broadway and Petitioner.
The deed that would effectuate the conveyance
specifically states there is to be no merger of leasehold and fee estates. Also,
since the interest in real property being conveyed will remain subject to the
Lease, Petitioner contends that no economic interest will be conveyed; that is,
Broadway will retain the right to receive all rent and other income required to
be paid by Petitioner under the Lease. Only "raw" title, subject to automatic
reverter and devoid of economic interest, will be transferred. Broadway will
continue to be treated as owner of the demised premises for Federal, State and
local income tax purposes.
No monetary consideration is being paid and no
monetary obligation is being undertaken. In addition, Petitioner and Broadway
anticipated in their negotiations prior to execution of the Lease an application
by Petitioner for real property tax exemption based on Petitioner’s exempt
status. The relevant provisions of Section 4.1(f) of the Lease state:
If Taxes are reduced and such reduction is directly attributable to
Tenant’s tax exempt status, which reduction is obtained at Tenant’s
sole cost and expense, Owner shall, upon submission of proof of such
reduction by Tenant or the City, apply the entire amount of such
reduction as a credit against the Fixed Annual Rent. Owner shall
cooperate with Tenant, at no cost or expense to Owner, if Tenant
seeks a reduction in Taxes as a result of Tenant’s tax exempt
status.
Therefore, Broadway, which is referred to in the Lease as the “Owner”, will not
receive any part of the real property tax exemption savings under provisions of
the Lease.
Petitioner states that no other agreement exists that entitles
Broadway to any consideration in consequence of real property tax savings
achieved as a result of Petitioner’s exempt status.
The conveyance will be subject to the Lease and to present and future
Building mortgages and other matters now of record.
Broadway's counsel has
advised that the consolidated mortgage now on the Building has an outstanding
balance of approximately $165,000,000.
Broadway would retain the right to
increase the existing mortgage or add new mortgages, and keep the proceeds of any
additional financing. Petitioner will not be obligated in any way with respect
to existing or future mortgages. Petitioner has obtained from the mortgagee a
non-disturbance agreement in connection with its Lease. The non-disturbance

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agreement provides, in essence, that so long as Petitioner is not in uncured
default under its Lease, it will not be disturbed in its possession even if there
is a foreclosure of the Building mortgage. Consequently, there is no real or
imputed obligation of Petitioner, the grantee/transferee, with respect to the
mortgage now on the Building or any future mortgage. Broadway retains the right
to receive all rents as well as the proceeds of all mortgage financing and
refinancing.
Petitioner's title remains subject to forfeiture if Broadway
becomes bankrupt or defaults under its mortgage. Petitioner has no right to cure
a default by Broadway under its mortgage.
In the event of condemnation, the proceeds from the condemnation belong to
Broadway, except as provided in the lease between Broadway and Petitioner. The
terms of the Lease, which will remain superior to the conveyance of title and not
be subject to merger, provide, in essence, that Petitioner will have no
condemnation claim for the value of the unexpired portion of the term of the
Lease. Petitioner would only be entitled to compensation for its fixtures and
relocation expenses, provided such award does not diminish the award made to
Broadway.
Petitioner is without authority to encumber the demised premises without
the express written consent of Broadway.
The Lease between Broadway and
Petitioner provides that Petitioner has no authority or power to cause or permit
a lien or encumbrance of any kind whatsoever to attach to the Building or the
demised premises.
Analysis
Section 1402 of the Tax Law imposes the transfer tax on each conveyance of
real property or interest therein when the consideration exceeds five hundred
dollars.
Section 1405(b)(6) of the Tax Law provides an exemption from the transfer
tax to the extent that a conveyance effectuates a mere change of identity or form
of ownership or organization where there is no change in beneficial ownership.
The transfer of title to real property to an Industrial Development Agency
(IDA) for the purpose of a tenant obtaining IDA financing did not result in a
change in beneficial ownership since the grantor of the conveyance to the IDA
retained all the benefits and burdens of ownership of the real property which was
the subject of the conveyance. (See Resnick Water St. Development Co., Adv Op
Comm T&F, January 12, 1993, TSB-A-93(2)R and Midtown Realty Company, Adv Op Comm
T&F, October 28, 1993, TSB-A-93(18)R.)
Conclusion
As described in Petitioner's facts, subsequent to the proposed conveyance
of the "raw" legal title to the space occupied by Petitioner, Broadway, the
grantor will continue to possess the same economic and beneficial ownership
interest in the space that it had prior to the conveyance. The fact that the
grantor will continue to possess the same economic and beneficial ownership
interest is represented by the following: (1) there will be non-merger language
in the deed so that the leasehold estate will continue to exist; (2) Broadway
will retain the right to receive all rent and other income required to be paid

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by Petitioner under the Lease; (3) Broadway's retention of rights with respect
to existing and new mortgages (4) the non-disturbance agreement regarding
Petitioner's leasehold interest in the event of a foreclosure of the Building
mortgage; (5) Broadway will continue to be treated as owner of the demised
premises for income tax purposes; (6) the provisions relative to the distribution
of condemnation proceeds; (7) the limitations placed on Petitioner with respect
to the authority to encumber the demised premises; and (8) the interest in real
property conveyed will revert automatically to Broadway at the expiration of the
Lease or at any earlier termination.
Therefore, the conveyance to Broadway of the air envelope enclosing the
space that Petitioner currently occupies is exempt from the transfer tax as a
conveyance which results in a mere change of identity or form of ownership or
organization where there is no change in beneficial ownership, pursuant to
section 1405(b)(6) of the Tax Law.

DATED: May 21, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau
The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.