As a national retail chain leasing store space, I'm structuring various long-term lease deals with landlords -- some in existing or planned shopping centers, some with due-diligence contingency periods before I'm bound, some involving lease extensions or a right of first refusal instead of a purchase option. Which of these eight common leasing scenarios trigger New York's Real Estate Transfer Tax, and when exactly does the tax clock start running in each?

Plain-English summary

A law firm representing a national retail chain ("Tenant") that leases store space throughout New York submitted eight common leasing scenarios to determine when New York's Real Estate Transfer Tax (RETT) applies. The background rule: a lease is a taxable "conveyance" only if it clears ALL THREE conditions in Tax Law §1401(e)/20 NYCRR §575.7(a) -- (1) term (with renewals) exceeds 49 years, (2) substantial capital improvements are or may be made for the lessee's benefit, and (3) the lease covers "substantially all" (90%+) of the relevant "premises." Separately, ANY lease coupled with a purchase option is taxable regardless of term (§575.7(c)).

Scenarios 1-3 (shopping-center store leases, 49+ years, no purchase option). Whether the tenant builds the store itself (1), the shopping center is still being built by the landlord (2), or the landlord builds the store (3), conditions (1) and (2) were conceded met, leaving only the "substantially all" question. Because a shopping center operates as a closely integrated retail enterprise -- shared parking/entrances/exits, coordinated municipal approvals, and shopping-center-typical lease terms (percentage rent, radius clauses, tenant-mix control) -- the Department held "the premises" means the ENTIRE shopping center (existing, in Scenarios 1 and 3, or as planned in good faith, in Scenario 2), not just the leased store. It grounded this in federal bankruptcy law's special protections for shopping-center landlords (11 U.S.C. §365(b)(3), and In re Trak Auto Corp. v. West Town Center, LLC, 367 F.3d 237 (4th Cir. 2004)) and the Department's own 1985 Gains Tax guidance (TSB-M-85(2)R), which used the identical 90%-of-the-whole-center rule. Since the leased store was under 90% of the whole shopping center's rentable space in each scenario, none of the leases are taxable.

Scenarios 4-6 (leases with a due-diligence "Interim Period"). The tenant signs a lease contingent on satisfying due-diligence conditions (environmental review, permits), with only limited access during an "Interim Period" -- not full possession. Following the Department's own Waldbaum, Inc. precedent (TSB-A-99(1)R), this Interim Period qualifies as a contract to sell real property without use or occupancy, exempt under Tax Law §1405(b)(9) -- limited access for studies doesn't rise to "use or occupancy." The lease becomes taxable only once the contingencies are satisfied AND actual use/occupancy begins: if the tenant builds, that's construction start; if the landlord builds, that's the Business Commencement Date (Scenario 4). A nominal non-refundable Interim-Period/Construction-Period fee ($100-$5,000) doesn't change this outcome for the Interim Period itself, but any part of that fee attributable to Construction-Period occupancy (if the tenant is building) IS included in taxable consideration (Scenario 5). If the contingencies are never satisfied and the lease terminates, nothing is ever taxed since the leasehold conveyance never completes (Scenario 6).

Scenario 7 (amending an existing sub-49-year lease to extend its term). Following Resnick Water St. Development Co. (TSB-A-93(2)R), if a lease amendment is "substantial" in nature, it's treated as creating a brand-NEW lease starting on the amendment's effective date -- so the relevant 49-year test applies only to the amended lease's OWN remaining term (not the original lease's already-expired years plus the new term combined). Here, since the amended lease's remaining term (including renewals) is under 49 years, the amendment is not taxable, even though the original-term-plus-extension together would exceed 49 years.

Scenario 8 (sub-49-year lease with a right of first refusal, no purchase option). Following the same Resnick Water St. precedent, a lease under 49 years containing only a right of first refusal (not a purchase option) is not subject to RETT -- because a right of first refusal, unlike an option, is excluded from "interest in real property" under Tax Law §1401(f), the general policy against taxing short leases isn't overridden.

What this means for you

For ANY shopping-center lease, "substantially all" means the WHOLE center, not the leased store

This is the origin ruling for a rule reused across many later opinions (e.g. TSB-A-07(2)R): a 49+ year shopping-center lease with substantial improvements is taxable only if the leased space is 90%+ of the ENTIRE shopping center's rentable space -- a threshold almost no single-store lease will cross.

Due-diligence access periods before a lease is truly binding don't start the RETT clock

Structuring a deal with a genuine contingency period -- where the tenant's access is limited to studies/inspections needed to secure permits, not actual possession -- keeps that period untaxed as a contract to sell without occupancy, even if a modest non-refundable fee changes hands.

Extending an existing lease resets the 49-year clock to the amendment date, if the amendment is "substantial"

A substantial lease amendment is treated as a new lease for RETT purposes, measured from the amendment date forward -- so a lease that's already run many years, then extended, is tested only on its NEW remaining term, not the combined original-plus-extension period.

A right of first refusal is a safe alternative to a purchase option if you want to keep a short lease untaxed

Unlike a purchase option (which makes ANY lease taxable regardless of term), a right of first refusal doesn't count as an interest in real property and won't convert an otherwise non-taxable sub-49-year lease into a taxable one.

Common questions

Q: My retail store's lease is for more than 49 years and involves substantial construction, but my store is only a small fraction of the shopping center. Is my lease taxable?
A: Likely not -- the "substantially all" test compares your leased space to the ENTIRE shopping center's total rentable space (existing or as planned), not just your store, so a single store under a shopping center's 90% threshold isn't taxable.

Q: I have due-diligence access to a property before my lease becomes binding. Does that access period trigger RETT?
A: No, as long as your access is limited to environmental/engineering/feasibility studies needed for permits -- that doesn't rise to "use or occupancy," so the interim period is exempt as a contract to sell without occupancy.

Q: If I extend an existing lease that's already run for many years, does the ORIGINAL term count toward the 49-year threshold?
A: No -- if the extension is a "substantial" modification, it's treated as a brand-new lease starting on the amendment date, and only the amended lease's own remaining term (not the already-expired original years) counts toward 49 years.

Q: Can I include a right of first refusal in a short-term lease without triggering RETT, the way a purchase option would?
A: Yes -- a right of first refusal is expressly excluded from "interest in real property" under the statute, so unlike a purchase option, it doesn't convert an otherwise non-taxable lease into a taxable one.

Citations and references

Statutes, guidance, and case law:

• Section 1402(a) of the Tax Law
• Section 1401(c) of the Tax Law
• Section 1401(d) of the Tax Law
• Section 1401(e) of the Tax Law
• Section 1401(f) of the Tax Law
• Section 1405(b) of the Tax Law
• Section 575.7(a) of the Real Estate Transfer Tax Regulations
• Section 575.7(b) of the Regulations
• Section 575.7(c) of the Regulations
• TSB-M-85(2)R (Summary of Opinion Letters Regarding the Real Property Transfer Gains Tax, 1985)
• TSB-A-99(1)R (Waldbaum, Inc., March 1, 1999)
• TSB-A-93(2)R (Resnick Water St. Development Co., January 12, 1993)
• TSB-A-90(5)R (cited in the opinion as "Beakman C. Cannon," May 29, 1990)
• TSB-A-87(8)-R (Syosset Shopping Center Associates, September 14, 1987)
• 11 U.S.C. § 365(b)(1), (b)(3), (f)(1), (f)(2)
• In re Trak Auto Corporation v. West Town Center, LLC, 367 F.3d 237 (4th Cir. 2004)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_2005.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a05_1r.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-05(1)R
Real Estate Transfer Tax
September 27, 2005

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M040315A

On March 15, 2004, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Harter, Secrest & Emery, LLP, c/o Christopher M. Potash, Esq., 1600
Bausch & Lomb Place, Rochester, NY 14604-2711. Petitioner, Harter, Secrest & Emery LLP,
submitted additional information for consideration on October 14, 2004 and May 11, 2005.
The issue raised by Petitioner is whether the transactions described below are subject to
the real estate transfer tax imposed by Article 31 of the Tax Law.
Petitioner represents a business ("Tenant") that leases and operates a chain of stores
throughout the United States, and has been and will be leasing real property in New York State
for operating its stores. Petitioner submits the following eight scenarios as the basis for this
Advisory Opinion:
Scenario 1
Tenant will enter into a lease agreement (the "Lease Agreement") with the owner
("Landlord") of certain real property (the "Property") under which Tenant, at Tenant's expense,
will build a new store in an existing shopping center owned by Landlord. The term of the Lease
Agreement (including all renewal options) will be for more than 49 years. The Lease Agreement
will not grant Tenant an option to purchase the Property.
In some instances, existing buildings in the shopping center will be demolished or
renovated to allow the new store to be built, while in other instances, the store will be built on
property in the shopping center that was formerly vacant or that contained a parking lot or related
enhancements. Furthermore, in some instances, the store will be a stand-alone structure, while in
other instances, the store will be physically connected to the other buildings in the shopping
center.
The shopping center, including the Property, will be located on land at a particular site
and may be subdivided into smaller parcels. All such land will be beneficially owned by the
landlord, or by entities that are owned directly or indirectly by the Landlord.
The parking areas serving the Property and the entrances and exits to the Property from
adjacent public streets will be an integrated part of the parking areas, entrances and exits serving

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the shopping center (e.g., the roadways and parking areas serving the proposed store and those
serving the shopping center will be integrated and connected so that a customer will be able to
travel to and from the proposed store and other areas of the shopping center areas without
requiring such customer to travel back onto a public street to do so). Although the Tenant may
have certain rights to control the parking areas nearest to its store, Tenant’s customers will
generally remain free to park in the other parking areas serving the shopping center.
With respect to any local municipal approvals obtained to permit the construction of the
store, such local municipal approvals generally will be granted after an examination of not only
the proposed store, but also an examination of how the proposed store relates to the shopping
center.
Petitioner states that the Property will constitute less than 90% of the total rentable space
in the shopping center (excluding common areas).
Scenario 2
Same as Scenario 1, except that the Property will be part of a shopping center to be built
by Landlord. When the shopping center is completed in accordance with Landlord's plans, the
Property will constitute less than 90% of the total rentable space in the completed shopping
center (excluding common areas).
Scenario 3
Same as Scenario 1, except that under the Lease Agreement, the store on the Property
will be built by Landlord, at Landlord's expense.
Scenario 4
Tenant executed a Lease Agreement with Landlord. After the execution of the Lease
Agreement, Tenant filed a memorandum of lease with the county clerk of the county in which
the Property is located. The term of the Lease Agreement is for more than 49 years and the
Property constitutes substantially all of the real estate parcel owned by Landlord. The Lease
Agreement does not grant Tenant an option to purchase the Property. The Lease Agreement
provides that Tenant's obligations under the lease are contingent upon the occurrence of certain
events (each a "Contingency" and collectively the "Contingencies"), including Tenant obtaining
reasonably acceptable results from its due diligence investigations of the Property and Tenant
obtaining the necessary local approvals to operate the intended store on the Property. During the

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period from the execution of the Lease Agreement until the Contingencies are satisfied (the
"Interim Period"), Tenant's rights of access to the Property are limited to the access needed for
Tenant to conduct an environmental review of the Property and engineering and feasibility
studies for the purpose of obtaining the necessary permits and approvals to satisfy the
Contingencies.
If the Contingencies are not satisfied, then Tenant has the right to terminate the Lease
Agreement. If the Contingencies are satisfied, then Tenant is obligated to proceed with the lease
in accordance with the terms of the Lease Agreement and a new store will be built on the
Property during the l80-day period (the "Construction Period") following the end of the Interim
Period. The Lease Agreement provides for monthly lease payments to commence on the date on
which the Tenant first commences business on the Property (the "Business Commencement
Date"). No payments are required to be made prior to the Business Commencement Date.
Six months after executing the Lease Agreement, the Contingencies are satisfied and
Tenant becomes obligated to proceed with the lease in accordance with the terms of the Lease
Agreement.
Scenario 5
Same as Scenario 4, except that under the Lease Agreement, Tenant is required to pay
Landlord a nominal non-refundable fee (e.g., $100 to $5,000) for the entire Interim Period and
the Construction Period.
Scenario 6
Same as Scenario 4, except that 6 months after executing the Lease Agreement, it
becomes known that a Contingency cannot be satisfied (e.g., zoning for the operation of a store
on the Property is denied). Tenant notifies Landlord that Tenant terminates the Lease Agreement
as a result of the failure of the Contingency.
Scenario 7
Tenant presently leases the Property pursuant to an existing lease agreement (the
"Original Lease Agreement") with Landlord. The Original Lease Agreement has a term
(including all renewal options) of less than 49 years and does not grant Tenant an option to

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purchase the Property. No real estate transfer tax was paid with respect to the Original Lease
Agreement.
Tenant and Landlord are negotiating an amendment of the Original Lease Agreement that
will extend the term of the Original Lease Agreement. The proposed lease agreement, as
amended (the "Amended Lease Agreement"), would have a remaining term (i.e., the period from
the date of amendment through the amended date of termination, including all renewal options)
of less than 49 years. However, the expired term (i.e., the period from the date of execution of
the Original Lease Agreement through the date of amendment of the Original Lease Agreement)
and the remaining term together will exceed 49 years. The Amended Lease Agreement will not
grant Tenant an option to purchase the Property.
Scenario 8
Tenant will enter into a Lease Agreement with Landlord for the Property. The Property
will constitute substantially all of the real estate parcel owned by Landlord, but the term of the
Lease Agreement (including all renewal options) will be for less than 49 years. The Lease
Agreement will not grant Tenant an option to purchase the Property, but will grant Tenant a
right-of-first refusal to purchase the Property at the same price that has been offered to Landlord
by a third party if Landlord accepts or proposes to accept the third-party offer.
Applicable law and regulations
Section 1402(a) of the Tax Law imposes the real estate transfer tax on each conveyance
of real property or interest therein and provides, in part:
A tax is hereby imposed on each conveyance of real property or interest therein
when the consideration exceeds five hundred dollars, at the rate of two dollars for each
five hundred dollars or fractional part thereof;...
Section 1401(c) of the Tax Law provides:
"Real property" means every estate or right, legal or equitable, present or future,
vested or contingent, in lands, tenements or hereditaments, including buildings, structures
and other improvements thereon, which are located in whole or in part within the state of
New York. It shall not include rights to sepulture.

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Section 1401(d) of the Tax Law provides, in part:
"Consideration" means the price actually paid or required to be paid for the real
property or interest therein, including payment for an option or contract to purchase real
property, whether or not expressed in the deed and whether paid or required to be paid by
money, property, or any other thing of value. It shall include the cancellation or
discharge of an indebtedness or obligation. It shall also include the amount of any
mortgage, purchase money mortgage, lien or other encumbrance, whether or not the
underlying indebtedness is assumed or taken subject to.
(1) In the case of a creation of a leasehold interest or the granting of an option
with use and occupancy of real property, consideration shall include but not be limited to
the value of the rental and other payments attributable to the use and occupancy of the
real property or interest therein, the value of any amount paid for an option to purchase or
renew and the value of rental or other payments attributable to the exercise of any option
to renew.
Section 1401(e) of the Tax Law provides:
"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 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. Notwithstanding the foregoing, conveyance of
real property shall not include a conveyance pursuant to devise, bequest or inheritance;
the creation, modification, extension, spreading, severance, consolidation, assignment,
transfer, release or satisfaction of a mortgage; a mortgage subordination agreement, a
mortgage severance agreement, an instrument given to perfect or correct a recorded
mortgage; or a release of lien of tax pursuant to this chapter or the internal revenue code.

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Section 1401(f) of the Tax Law provides:
"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 part:
The tax shall not apply to the following conveyances:
*

*

*

9. Conveyances of real property which consist of the execution of a contract to
   sell real property without the use or occupancy of such property or the granting of an
   option to purchase real property without the use or occupancy of such property.
   Section 575.7(a) of the Real Estate Transfer Tax Regulations (the “Regulations”)
   provides, in part:
   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
   (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

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constituting the real property, premises shall include, but not be limited to the
following:
(i) an individual building, except for space which constitutes an
individual condominium or cooperative unit;
(ii) an individual condominium or cooperative unit; or
(iii) where a lease or sublease is of vacant land only, any portion of
such vacant land.
Section 575.7(b) of the Regulations provides, in part:
Consideration in the case of the creation of a taxable lease or sublease.
(1) In the case of the creation of a lease which constitutes a conveyance subject to
tax, the consideration used to compute the tax is the present value of the right to receive
rental payments or other payments attributable to the use and occupancy of the real
property. Such consideration also includes the present value of rental or other payments
attributable to any renewal term. In the case of the creation of a taxable sublease, the
consideration is computed in the same manner as in the creation of a taxable lease except
that the value of the remaining prime lease rental payments must be subtracted.
(2) A discount rate equal to 110 percent of the federal long-term rate compounded
semiannually, which is determined pursuant to section 1274(d) of the United States
Internal Revenue Code, is required to be used in determining the present value of such
payments which constitute consideration in the case of the creation of a taxable lease or
sublease. Such federal long-term rate in effect 30 days prior to the date of transfer shall
be used when computing such discount rate. If the taxpayer establishes:
(i) that a discount rate which is greater than 110 percent of the federal
long-term rate is appropriate in his or her particular circumstances; and
(ii) that using a discount rate equal to 110 percent of the federal long-term
rate results in the computation of consideration which exceeds the fair market
value of the real property subject to the lease or sublease, the department will
allow the use of a discount rate that results in a computation of consideration that

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is equal to the fair market value of such real property. The discount rate is
applied to net rents. Net rents means the amount by which gross rents exceed the
lessor's or sublessor's operating costs. Such operating costs include amounts paid
for heat and gas, electricity, furnishings, insurance, maintenance, management
and real estate taxes.
Section 575.7(c) of the Regulations provides, in part:
Creation of a lease for less than 49 years coupled with the granting of an option
to purchase
(1) An option to purchase real property is an interest in real property. Where an
option to purchase real property is coupled with the granting of the right to use and
occupancy of the real property, a conveyance subject to the transfer tax has occurred.
Therefore, the creation of a lease coupled with the granting of an option to purchase the
real property, regardless of the term of the lease, is a conveyance subject to the transfer
tax.
Opinion
Scenarios 1-3
In scenario 1, Tenant is responsible for building a new store in an existing shopping
center owned by Landlord. In scenario 2, Tenant is again responsible for building the new store,
which will be part of a shopping center to be built by Landlord. In scenario 3, Landlord is
responsible for building the new store in an existing shopping center owned by Landlord.
As provided by section 1401(e) of the Tax Law and section 575.7(a) of the Regulations,
the creation of the lease in each scenario will constitute a taxable conveyance if all three of the
following conditions are met: 1) the sum of the term of the lease including any options for
renewal exceeds 49 years, 2) substantial capital improvements are or may be made for the benefit
of the lessee, and 3) the lease is for substantially all of the premises constituting the real
property. The facts indicate that the first two conditions are met in each of scenarios 1-3. Thus,
to determine whether each lease is subject to tax, the issue at hand is whether the lease described
in each scenario is for substantially all of the premises constituting the real property.

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To make this determination, it is necessary to analyze what are the premises constituting
the real property under the facts presented. As detailed in scenario 1, the analysis may be
complicated by the fact that the nature of the premises constituting the real property in a
shopping center can vary dramatically in each particular case. Section 575.7(a)(3) of the
Regulations provides that the term premises includes, but is not limited to, an individual
building, condominium or cooperative unit, or any portion of vacant land. It is important to view
the matter with an eye on the unique nature of the shopping center enterprise from a business and
legal perspective, and look beyond the examples given in the regulation. Recognizing that a
shopping center is operated by the landlord and the tenants as a closely integrated retail
enterprise, the relevant premises must include all of the real property constituting the shopping
center.
From a business perspective, shopping center leases generally contain provisions that
distinguish them from standard commercial real estate leases. These include provisions such as
percentage rent clauses (based on a percentage of a tenant’s store sales), radius clauses (limiting
a tenant’s operation of another store within a certain geographic radius of the shopping center),
and provisions related to products to be sold (tenant mix), use and control of parking and
common areas, hours of operation, merchandise displays and show windows, signage,
advertising, use of trade name and name changes. These types of lease provisions demonstrate
that landlords generally have an interest not only in the real estate aspects of the shopping center,
but also in the tenants’ retail operations in relation to the entire shopping center.
From a legal perspective, it is significant that shopping center landlords have special
protections under Title 11 of the United States Code (“the Code”) with respect to executory
contracts and unexpired leases of tenants in bankruptcy (11 U.S.C. § 365). Among other
requirements, the Code provides that an unexpired lease that is in default may not be assumed by
the bankruptcy trustee and that any unexpired lease may not be assigned unless certain
assurances are given to the landlord by the tenant (11 U.S.C. § 365(b)(1) and (f)(2)). Section
365(b)(3) of the Code requires that adequate assurance of future performance of a lease of real
property in a shopping center includes adequate assurance:
(A) of the source of rent and other consideration due under such lease, and in the
case of an assignment, that the financial condition and operating performance of the
proposed assignee and its guarantors, if any, shall be similar to the financial condition
and operating performance of the debtor and its guarantors, if any, as of the time the
debtor became the lessee under the lease;
(B) that any percentage rent due under such lease will not decline substantially;

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(C) that assumption or assignment of such lease is subject to all the provisions
thereof, including (but not limited to) provisions such as a radius, location, use, or
exclusivity provision, and will not breach any such provision contained in any other
lease, financing agreement, or master agreement relating to such shopping center; and
(D) that assumption or assignment of such lease will not disrupt any tenant mix or
balance in such shopping center.
In a recent decision by the United States Court of Appeals, In re Trak Auto Corporation v
West Town Center, LLC, 367 F3d 237 (4th Cir 2004), the court nullified the assignment of a
shopping center lease pursuant to the provisions of 11 U.S.C. § 365(b)(3) and (f)(1). In its
analysis, the court stated:
We begin our inquiry with a look at the interesting history of Congress’s efforts to
protect shopping center landlords in § 365(b)(3) of the Bankruptcy Code. Congress has
been interested in the financial well-being of shopping centers since at least the late
1970s. Specifics, such as the importance of a carefully selected tenant mix, have not
escaped Congress’s attention. The House Judiciary Committee discussed the tenant mix
subject in a 1977 report:
A shopping center is often a carefully planned enterprise, and though it
consists of nuemrous [sic] individual tenants, the center is planned as a single
unit, often subject to a master lease or financing agreement. Under these
agreements, the tenant mix in a shopping center may be as important to the lessor
as the actual promised rental payments, because certain mixes will attract higher
patronage of the stores in the center.
Taken as a whole, the relevant provisions of the Code and the Fourth Circuit’s analysis
clearly illustrate the unique nature of shopping center lease arrangements. A landlord in a
shopping center retains strong legal and economic control in the operation and use of the entire
shopping center property, including each store that is leased within it.
Although there is a lack of established precedent regarding these issues under the real
estate transfer tax, this conclusion is consistent with Tax Department policy expressed under the
former real property transfer gains tax (“Gains Tax”). In 1985, the Department issued Technical
Services Bureau Memorandum entitled Summary of Opinion Letters with Regard to the Real
Property Transfer Gains Tax, TSB-M-85(2)R, which stated, in part:

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In determining whether a lease constitutes “substantially all” of the premises
constituting the real property, the amount of area covered by the lease is compared to the
total area available for use by other tenants, whether previously rented or not. Thus, in a
shopping center situation in which no one lease to a tenant is for more than 90% of the
space, the creation of such lease is not taxable. An option to purchase with use and
occupancy of the real property is taxable regardless of the amount of space leased.
Accordingly, in scenarios 1 and 3, for the purpose of determining whether the leased
Property constitutes substantially all of the premises, it is appropriate to compare the total area
leased under the store lease to the total rentable area within the existing shopping center,
exclusive of common areas. In scenario 2, provided the plans for the shopping center and related
representations are made in good faith, it is appropriate to compare the total area leased under the
store lease to the total rentable area for the planned shopping center, exclusive of common areas.
These conclusions do not apply to a lease for real property not located in a shopping center or
where there is an option to purchase contained in the lease. In addition, since the analysis is
highly dependent on the particular facts in each instance, the determination of taxability must be
made on a case by case basis.
Scenario 4
In this scenario, Tenant and Landlord execute a taxable Lease Agreement and file a
memorandum of lease with the County Clerk of the county where the property is located. The
Lease Agreement is contingent upon certain events, including due diligence efforts to be
conducted during an interim period until the contingencies are satisfied.
In Waldbaum, Inc., Adv Op Comm T&F, March 1, 1999, TSB-A-99(1)R, it was
concluded that the "interim term" of a lease, during which the tenant is conducting due diligence
investigations of the property, is not deemed to be part of the lease term for purposes of
determining whether or not the lease term is more than 49 years. The advisory opinion stated:
The interim term of the ground lease can be characterized, pursuant to section
1405(a)(9) of the Tax Law, as a contract to sell real property without the granting of the
use or occupancy of such property. The fact that Petitioner [the tenant] has access to the
property during the interim period, in order to conduct engineering and feasibility studies
for the purpose of securing building permits and approvals, does not rise to the level of
having the "use or occupancy" of the property.

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At the time Petitioner is able to obtain all the requisite permits and approvals for
the construction of the initial improvements on the Premises, the interim term would end.
Petitioner would then be able to begin construction on the Premises. If Petitioner were to
begin such construction, it would then be deemed to have the "use and occupancy" of the
property and the time period during which construction was taking place would be
deemed to be part of the lease term for purposes of determining whether or not the term
of the lease is 49 years or more.
The Interim Period in Scenario 4 is comparable to the interim term presented in
Waldbaum, Inc., supra, since Tenant only has access to the Property to conduct an environmental
review and engineering and feasibility studies for the purpose of obtaining the necessary permits.
Accordingly, Tenant's limited access to the Property during the Interim Period does not rise to
the level of having "use or occupancy." Thus, in this scenario, the execution of the Lease
Agreement and the filing of the memorandum of lease are exempt from real estate transfer tax
pursuant to section 1405(b)(9) of the Tax Law.
Upon satisfaction of the Contingencies, Tenant is bound by the terms of the Lease
Agreement. Accordingly, the leasehold conveyance becomes taxable when Tenant receives the
use or occupancy of the Property, as the exemption set forth in section 1405(b)(9) of the Tax
Law no longer applies. As explained in Waldbaum, Inc., supra, if Tenant is responsible for the
construction of the new store, then Tenant’s use or occupancy would begin upon the
commencement of the Construction Period. However, if Landlord is responsible for such
construction, Tenant’s use or occupancy would begin when the store is completed and Tenant
occupies the property in accordance with the terms of the Lease Agreement. In this scenario,
that would appear to be the Business Commencement Date.
The consideration paid will equal the present value of the net rental and other payments
due under the Lease Agreement, in accordance with section 575.7(b) of the Regulations.
Scenario 5
This scenario follows the same facts and analysis as in Scenario 4, except that under the
Lease Agreement, Tenant is required to pay Landlord a nominal non-refundable fee (e.g., $100
to $5,000) for the entire Interim Period and the Construction Period.
Based on the facts presented, no real estate transfer tax is due upon the execution of the
Lease Agreement or upon the filing of the memorandum of lease with the county clerk of the
county in which the Property is located. The fact that Tenant must make a nominal payment

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upon the execution of the Lease Agreement does not affect the taxability of the lease with respect
to the Interim Period. Any payments made to Landlord as compensation for Tenant’s limited
rights of access necessary to conduct its due diligence efforts during the Interim Period, which
rights do not rise to the level of use or occupancy of the Property, would not be included in
consideration.
Also similar to Scenario 4, the leasehold conveyance becomes taxable when Tenant
receives the use or occupancy of the Property, as the exemption set forth in section 1405(b)(9) of
the Tax Law no longer applies. If Tenant is responsible for the construction of the new store, the
lease term would begin with the Tenant’s use or occupancy upon the commencement of the
Construction Period. Any payments made to Landlord for the use and occupancy of the Property
during such Construction Period would be included in the consideration subject to tax, along
with the present value of rent payments, as described in section 575.7(b) of the Regulations.
If Landlord is responsible for such construction, Tenant’s use or occupancy would begin
in this scenario on the Business Commencement Date. The consideration paid will equal the
present value of the net rental and other payments due under the Lease Agreement, in accordance
with section 575.7(b) of the Regulations.
Accordingly, since the nominal fee in this scenario relates to both the Interim Period and
the Construction Period, if Tenant is responsible for construction of the new store, the amount of
the fee related to Tenant’s use and occupancy during the Construction period should be included
in taxable consideration.
Scenario 6
This scenario follows the same facts and analysis as in Scenario 4. However, since the
Contingencies are not satisfied, the proposed Lease Agreement is terminated at the conclusion of
the Interim Period. As in Scenario 4, based on the facts presented, no real estate transfer tax is
due upon the execution of the Lease Agreement or upon the filing of the memorandum of lease
with the county clerk of the county in which the Property is located. Since the contingencies are
not met, the Lease Agreement never becomes binding, and the leasehold conveyance is not
completed. Thus, the proposed lease is not subject to tax.

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Scenario 7
In this scenario, Tenant and Landlord are negotiating an amendment to an existing lease.
The Amended Lease Agreement would have a remaining term (i.e., the period from the date of
the amendment through the amended termination date including renewal options) of less than 49
years. It is also assumed that the lease is for substantially all of the premises constituting the real
property and substantial capital improvements are or may be made for the benefit of the lessee.
Resnick Water St. Development Co., Adv Op Comm T&F, January 12, 1993, TSB-A­
93(2)R, dealt with certain leasehold issues with respect to the real estate transfer tax and the
former Gains Tax. The issues concerned a modification of an existing leasehold and the
taxability of a lease coupled with a right of first refusal. The advisory opinion stated:
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 [sic] C. Cannon Adv Op Comm T & F, May 29, 1990,
TSB-A-88(1)-R [sic, correct citation is TSB-A-90(5)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 be created for gains tax purposes, the term
of which would start on the effective date of such modifications.
*

*

*

…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 [sic] C. Cannon, supra, and Syosset Shopping
Center Associates, supra, where an existing lease is modified, such modifications will

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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.
In this scenario, assuming the amendments extending the term of the Original Lease
Agreement are substantial in nature, the result will be the creation of a new Lease Agreement
which would begin on the effective date of the modifications. However, since the Amended
Lease Agreement will have a remaining term (including all renewal options) of less than 49
years, the lease is not subject to real estate transfer tax.
Scenario 8
As found in Resnick Water St. Development Co., supra, the creation of a lease for a term
of less than 49 years containing a right of first refusal is not subject to real estate transfer tax.

DATED: September 27, 2005

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

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