Three unrelated companies formed an LLC that was designated by a state development corporation to redevelop the old 14th Street Armory site into a mixed-use project -- retail, senior housing, and a university faculty residence -- with each company intending to end up owning and running its own separate piece. We have to hold the whole property through one LLC at first because NYC won't let us record separate condominium units until construction is 'as built,' and because the city wanted a joint venture team, not three separate developers. Once construction is done and we convert to a condominium, will distributing each finished unit to the company that's always been designated to own it trigger New York's Real Estate Transfer Tax?

Plain-English summary

Armory Place LLC ("Petitioner") was composed of three unrelated members -- MKT Associates LLC ("Orda"), Chancellor of the Armory, Inc. ("Chancellor"), and Armory Retail Associates LLP ("Armory Retail") -- and was designated by the Empire State Development Corporation ("ESDC"), through a competitive Request for Proposal process, to redevelop the 14th Street Armory site in Manhattan. The redevelopment plan required demolishing the existing structure, remediating the site, and building a mixed-use project comprising three physically and structurally integrated but functionally distinct components: a commercial/retail space (the "Retail Unit," ultimately owned by Armory Retail), a senior housing facility (the "South Unit," ultimately owned by Chancellor), and a university faculty residence (the "North Unit," ultimately owned by Orda).

Why one LLC had to hold title first. Although each member's preferred structure was to directly acquire, own, develop, and manage its own Unit, two practical constraints required Petitioner to initially hold title to the whole property: (1) because the Units would be physically integrated, the project had to be developed as a single condominium conversion, and New York City's Condominium Act (as applied by the NYC Real Property Assessment Bureau) doesn't allow a first conveyance of any condominium unit until floor plans are certified "as built" -- meaning individual units couldn't be conveyed to their respective owners until construction was substantially complete; and (2) the ESDC's Request for Proposal specifically favored a joint-venture team submission, reflecting the combined developmental and managerial expertise of all three members. Prior to conversion, each member separately funded the construction of its own Unit, and Petitioner's Operating Agreement "clearly and consistently" allocated all benefits, obligations, taxes, profit/loss allocations, cash distributions, and capital contributions attributable to each Unit to that Unit's designated owner alone, with sole design discretion over that Unit and no beneficial interest in the other members' Units. The Condominium Declaration itself stated that Petitioner, as Declarant, was making the submission for the benefit of its three members -- meaning Petitioner would, in the Department's words, act "in effect... in the capacity of a nominee, holding the property on behalf of its three members."

Exempt as a mere change of form. Once the project was complete, Petitioner would convert to a condominium association and convey the three Units to their respective owners. The Department held this entire structure -- holding title through the LLC during construction, then converting and distributing the finished Units -- is exempt from the real estate transfer tax under §1405(b)(6), following its own precedent in 115 Spring Street Company, TSB-A-94(3)-R (each cooperative housing partner beneficially owned only the unit occupied, so the exchange of shares for units at conversion was a mere change of form), and Vacation Village Homeowners Association, Inc., TSB-A-94(6)-R (same principle for a homeowners' association converting to condominium ownership). Because each Unit Owner's beneficial ownership of its own Unit continuously vested from the LLC's inception -- unaffected by the temporary need to hold legal title jointly -- the eventual conveyance of legal title didn't represent any real change in beneficial ownership, and so the whole conversion and unit-by-unit distribution qualified for the exemption.

What this means for you

A joint-venture LLC required by circumstance to hold title jointly can still distribute finished units tax-free, as long as beneficial ownership was always segregated

If regulatory timing rules (like a condominium conversion's "as built" certification requirement) or a developer-selection process (like a government agency favoring joint-venture bids) force multiple unrelated parties into a single title-holding entity during construction, that doesn't create a taxable event later -- as long as the operating agreement locks in each party's separate beneficial ownership, obligations, and financing responsibility for its own piece from day one.

Government-mandated or government-preferred joint development structures get the same tax treatment as purely private multi-owner arrangements

The Department didn't treat the ESDC's involvement (a public development agency selecting the joint venture) any differently from a purely private multi-partner condominium conversion -- what matters is the LLC operating agreement's allocation of beneficial ownership, not who initiated or required the joint structure.

"Nominee" status for tax purposes requires real, consistent economic separation in the governing documents, not just an intent to eventually split up the property

The Department's conclusion rested heavily on the LLC Operating Agreement's specificity: separate funding, separate tax/profit/loss allocation, separate design discretion, and no cross-ownership between members' Units -- a loosely drafted joint venture agreement without this level of specificity might not support the same "mere nominee" characterization.

Common questions

Q: If a government development agency requires multiple companies to develop a site as a single joint-venture LLC, does distributing the finished, separately-owned units later trigger transfer tax?
A: Not if the LLC's operating agreement clearly and consistently allocates each unit's benefits, obligations, and beneficial ownership to its intended owner from the outset -- the eventual legal-title conveyance is treated as a mere change of form, not a new transfer.

Q: Does it matter that we can't legally convey individual condominium units until construction is "as built"?
A: No -- that timing constraint is exactly the kind of practical necessity the mere-change-of-form exemption accommodates, as long as beneficial ownership was never actually shared or commingled during the interim holding period.

Q: Do we need to fund and account for our unit separately from our co-developers during construction to preserve this exemption?
A: Yes -- this ruling's outcome depended on each member separately funding its own unit's construction and on the operating agreement isolating each unit's income, loss, tax items, and cash flow to its own designated owner, with no cross-interests among the members.

Citations and references

Statutes, guidance, and case law:

• Section 1402 of the Tax Law
• Section 1401(e) of the Tax Law
• Section 1401(f) of the Tax Law
• Section 1405(b)(6) of the Tax Law
• 115 Spring Street Company, Adv Op Comm T&F, March 30, 1994, TSB-A-94(3)-R
• Vacation Village Homeowners Association, Inc., Adv Op Comm T&F, May 24, 1994, TSB-A-94(6)-R

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a99_3r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(3)R
Real Estate Transfer Tax
May 19, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M990319A

On March 19, 1999, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Armory Place LLC, c/o Orda Management Corporation, 225 Park Avenue
South, New York, NY 10003.
The issue raised by Petitioner, Armory Place LLC, is whether the transfers of condominium
units located on 14th Street, New York, NY, from Petitioner to its respective members are exempt
from the Real Estate Transfer Tax imposed pursuant to Article 31 of the Tax Law.
Petitioner presents the following facts. Petitioner is a limited liability company ("LLC")
composed of three separate members: MKT Associates LLC ("Orda"); Chancellor of the Armory,
Inc. ("Chancellor"); and Armory Retail Associates LLP ("Armory Retail"). Petitioner, in accordance
with a Request for Proposal of the Empire State Development Corporation (the "ESDC"), recently
was designated by the ESDC to develop the 14th Street Armory site (the "Property"), which is located
on 14th Street between 6th Avenue and 7th Avenue, New York, NY, Block 790, Lot 19. The
development plan for the Property requires that the present structure located on the Property be
demolished, the site remediated, and a mixed-use project be financed and developed on the Property.
The project will be comprised of three components: one commercial/retail space (the "Retail Unit");
one senior housing facility (the "South Unit"); and one university faculty residence (the "North
Unit;" the Retail Unit, the South Unit and the North Unit are hereinafter individually referred to as
a "Unit" and collectively as the "Units"). As outlined below, each Unit will be ultimately be owned
by a member of Petitioner as a "Unit Owner."
The preferred ownership structure for the project to succeed and financing to be obtained for
construction would be for each member of Petitioner to directly acquire, own, develop and manage
its Unit. For two reasons, however, it is necessary that the Property initially be owned through
Petitioner. First, although the three Units will be functionally distinct, they will be physically and
structurally integrated. Therefore, it is necessary that the development of the project be
accomplished through a conversion to a condominium structure of ownership. However, ownership
of the Property cannot be severed and each Unit transferred to a member of Petitioner prior to the
substantial completion of all improvements because the New York City Condominium Act provides
that a first conveyance of a condominium unit cannot occur until floor plans have been certified "as
built." It has been the practice of the New York City Real Property Assessment Bureau ("RPAB")
not to accept condominium declarations for recording until such plans can be certified "as built."
Second, the alliance of developmental and managerial experience of the members of Petitioner is

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essential to meeting the needs of both the ESDC and the surrounding community. The ESDC's
Request For Proposal acknowledged the benefits of having the property developed by a joint venture,
specifically allowing for team submissions.
In view of the position of the RPAB, Petitioner intends to take title to the Property. Upon
completion of the project and acceptance of the condominium declaration by the RPAB, Petitioner
will be converted to a condominium association. Petitioner will then convey each of the three Units
to its members as Unit Owners, so that Armory Retail will own the Retail Unit, Chancellor will own
the South Unit, and Orda will own the North Unit.
Prior to the conversion to condominium, each member of Petitioner will separately fund the
construction, development and improvement of its respective Unit. Petitioner's operating agreement
(the "LLC Operating Agreement") clearly and consistently separates the benefits and obligations
regarding the Property such that, from the outset, each Unit Owner receives all benefits and bears
all obligations of its own Unit, and has no beneficial interest in those of the other Unit Owners. Prior
to conversion, all federal, state and local taxes, all allocations of profit and loss, all cash distributions
and all capital contributions attributable to each Unit will be allocated to its respective Unit Owner,
and each Unit Owner will have sole design discretion with respect to its Unit.
Further, the Condominium Declaration as drafted specifically provides that the Petitioner,
as Declarant thereunder, is making the submission for the benefit of its three members.
Consequently, Petitioner, in effect, will be acting in the capacity of a nominee, holding the property
on behalf of its three members.
Applicable Law
Section 1402 of the Tax Law imposes the real estate transfer tax on each conveyance of real
property or interest therein when the consideration exceeds five hundred dollars. The term
"conveyance" is defined in section 1401(e) of the Tax Law. Included in the definition of conveyance
is the transfer or transfers of any interest in real property by any method.
Subdivision (f) of section 1401 of the Tax Law provides:
(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. . . .

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Finally, section 1405(b)(6) of the Tax Law sets forth that conveyances are exempt from the
real estate transfer tax to the extent that they "effectuate a mere change of identity or form of
ownership or organization where there is no change in beneficial ownership. . . ."
Conclusions
In 115 Spring Street Company, Adv Op Comm T&F, March 30, 1994, TSB-A-94(3)-R,
where each partner pursuant to a partnership agreement held a beneficial interest solely in the unit
he occupied and had no interest in the other partners' units, it was recognized that the beneficial
ownership of each unit vested with each individual partner without regard to ownership of the
property being held by the petitioner. Thus, the transfer of the shares allocated to the units from the
cooperative housing corporation to each partner whereby each partner received shares allocated to
the unit he occupied constituted a mere change of identity or form of ownership or organization,
since there was no change in the beneficial ownership of each unit.
In Vacation Village Homeowners Association, Inc., Adv Op Comm T&F, May 24, 1994,
TSB-A-94(6)-R, where each participant in the conversion of a homeowners association into
condominium units held a beneficial interest solely in the lot and home he or she occupied as his or
her residence and held no interest in the other homeowner's lots and homes, it was recognized that
the beneficial ownership of each lot and home had continuously vested with each individual
homeowner, without regard to the homeowner being a member of a homeowners association. Thus,
the conversion of the lots and homes within Petitioner into condominium units and the resulting
exchange by the homeowners of their lot deeds for condominium unit deeds constituted a mere
change of identity or form of ownership or organization, since there was no change in the beneficial
ownership of each lot and home.
In the instant case, each Unit Owner, pursuant to the LLC Operating Agreement, holds a
beneficial interest in its own Unit and holds no interest in the Units of the other Unit Owners. Under
the proposed plan, upon completion of the project, Petitioner will convert to a condominium
association and will then convey the three Units to the respective Unit Owners, so that Armory
Retail will own the Retail Unit, Chancellor will own the South Unit and Orda will own the North
Unit. Accordingly, it is recognized that the beneficial ownership of each individual Unit will
continuously vest with such Unit's respective Unit Owner, without regard to the Unit Owners being
members in Petitioner.
Therefore, pursuant to the rationale set forth in 115 Spring Street Company, and Vacation
Village Homeowners Association, Inc., supra, the conversion of the Property by Petitioner into
condominium units and the resulting conveyance to each Unit Owner of its respective Unit will not
effectuate a change in the beneficial ownership interest as held by the Unit Owners prior to the
conversion. Accordingly, pursuant to Section 1405(b)(6) of the Tax Law, the conversion of the

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Units within Petitioner into condominium units and the conveyance of such Units to their respective
Unit Owners will constitute a total mere change of identity or form of ownership or organization,
and such conveyances will be exempt from the real estate transfer tax.

DATED: May 19, 1999

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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