I own a Queens shopping center and want to ground-lease a small newly-created parcel (less than half the shopping center's total rentable space) to a new retail tenant for more than 49 years, with substantial construction planned but no purchase option. The lease easily clears two of the three tests for a taxable long-term lease -- but does the third test, requiring the lease to cover 'substantially all' of the real property, look at just this one parcel or at my entire integrated shopping center?

Plain-English summary

A landlord owned about 5.085 contiguous acres in Queens operated as an integrated shopping center: a free-standing supermarket, a free-standing bank building, a fenced garden center, and a common parking lot shared by all tenants. To make room for a new retail building, the landlord negotiated with the garden center tenant to shrink that tenant's footprint (moving a fence and rerouting truck access), freeing up roughly 0.498 acre (combined with an adjacent unimproved corner) as a new "Leased Parcel." The landlord planned to ground-lease this parcel to a new tenant for more than 49 years, with no purchase option; the new tenant would build a retail building and additional parking, all integrated into the shopping center's shared parking, common entrances/exits, and uniform common-area rules, with many tenant leases (including in the new building) carrying restrictive covenants on what could be sold. The Leased Parcel would be under 50% of the shopping center's total rentable space.

New York generally exempts ordinary leases from RETT, but Tax Law §1401(e) and 20 NYCRR §575.7(a) make a long-term lease a taxable conveyance if ALL THREE conditions are satisfied: (1) the lease term, including renewal options, exceeds 49 years; (2) substantial capital improvements will be made for the lessee's benefit; and (3) the lease covers "substantially all" — defined as 90% or more — of the rentable space of "the premises," exclusive of common areas. The petitioner conceded conditions (1) and (2) were met (the lease exceeded 49 years, and substantial construction was planned), leaving only whether the ground lease covered "substantially all" of "the premises."

The regulation's definition of "premises" (an individual building, an individual condo/co-op unit, or a portion of vacant land) doesn't neatly address a shopping center scenario, so the Department applied its own prior reasoning from TSB-A-05(1)R: because a shopping center is operated by the landlord and all its tenants as a closely integrated retail enterprise — not a collection of independent parcels — "the premises" for this test must be the ENTIRE shopping center, not just the individual parcel being leased. The Department pointed to the distinctive features of shopping center leases recognized both commercially and legally: percentage-rent clauses tied to a tenant's sales, radius clauses restricting competing stores nearby, provisions controlling tenant mix, shared parking and common areas, uniform hours/signage/advertising rules, and — citing 11 U.S.C. § 365 and In re Trak Auto Corp. v. West Town Center, LLC, 367 F.3d 237 (4th Cir. 2004) — the recognition by Congress and the courts that shopping center landlords retain strong legal and economic control over the operation and use of the entire center, including every leased store within it.

Applying that framework: because the Leased Parcel would share all public parking (controlled by the landlord under uniform rules), be subject to common-area rules applicable shopping-center-wide, and be under 90% of the entire shopping center's total rentable space, the ground lease did NOT cover "substantially all" of the relevant premises. With the third condition unmet, the ground lease — despite exceeding 49 years and involving substantial construction — is not a taxable RETT conveyance. The Department explicitly limited this conclusion to shopping-center leases without a purchase option, and noted the analysis is fact-specific and must be evaluated case-by-case for different facts.

What this means for you

For shopping-center leases, "substantially all of the premises" means the WHOLE center, not just the leased parcel

If you're leasing out a new or existing parcel within an integrated shopping center for more than 49 years with planned substantial improvements, the 90% "substantially all" test is measured against the total rentable space of the ENTIRE shopping center -- not the individual parcel -- which makes it much harder for any single parcel's long-term lease to trigger RETT.

The shopping-center characterization depends on real integration features, not just physical proximity

The Department's analysis leaned on concrete indicators of integration -- shared parking under uniform landlord control, common-area rules applicable across all tenants, tenant-mix restrictive covenants, and the kind of percentage-rent/radius-clause provisions distinctive to shopping-center leases. A collection of separately-operated, non-integrated parcels under common ownership likely wouldn't get this same favorable "whole center" premises definition.

This favorable result doesn't extend to leases with a purchase option, or leases outside a shopping center

The Department was explicit that these conclusions don't apply to a lease containing a purchase option (which triggers RETT regardless of term or the "substantially all" test, per other rulings like TSB-A-10(5)R) or to property that isn't part of an integrated shopping-center enterprise.

Common questions

Q: If I ground-lease part of my shopping center for more than 49 years with substantial planned construction, is that automatically a taxable RETT conveyance?
A: Not automatically -- it depends on whether the leased parcel covers 90%+ of the shopping center's TOTAL rentable space (measuring the whole integrated center, not just the parcel). If it's under that threshold, no RETT is due even though the other two conditions (49+ year term, substantial improvements) are met.

Q: Does this "whole shopping center" measurement rule apply to any group of commonly-owned properties, or just true shopping centers?
A: Just genuinely integrated shopping centers -- the Department's reasoning depended on features like shared parking under common control, uniform common-area rules, and shopping-center-typical lease provisions (percentage rent, radius clauses, tenant mix). A loosely-connected group of separate properties likely wouldn't qualify for this treatment.

Q: Would the answer change if the new lease included an option for the tenant to eventually buy the parcel?
A: Yes -- the Department expressly said this analysis doesn't apply if the lease contains a purchase option, since a lease coupled with a purchase option is independently taxable regardless of term or the substantially-all test.

Citations and references

Statutes, guidance, and case law:

• Section 1402(a) of the Tax Law
• Section 1401(c) of the Tax Law
• Section 1401(e) of the Tax Law
• Section 1401(f) of the Tax Law
• Section 575.7(a) of the Real Estate Transfer Tax Regulations
• TSB-A-05(l)R (Harter, Secrest & Emery, LLP, September 27, 2005)
• 11 U.S.C. § 365
• 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_2007.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a07_2r.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-07(2)R
Real Estate Transfer Tax
May 16, 2007

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M070131A

On January 31, 2007, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Marmon Enterprises, Inc., 197-23 47th Avenue, Flushing, New York
11358.
The issue raised by Petitioner, Marmon Enterprises, Inc., is whether real estate transfer
tax is due upon the signing of a lease with a term in excess of 49 years that covers a portion of a
retail shopping center as described below.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is the fee owner of approximately 5.085 contiguous acres in Queens,
New York, on which there is a free-standing supermarket, a free-standing bank building, a
fenced-in retail garden center (including a retail building and auxiliary structures), and a
common parking lot shared by all of the retail tenants. The property is operated by Petitioner as
an integrated shopping center for all of the retail tenants.
On the northeast corner of the property, there is a small unimproved area that has been
used, among other things, for truck ingress and egress to the garden center, temporary parking
and unloading of trucks making deliveries to the garden center, and private parking as permitted
by Petitioner. Petitioner would like to combine the unimproved area with a small portion of the
garden center property so that a new retail building with expanded parking can be added to the
shopping center. Petitioner believes that the new retail stores will draw additional customers to
the shopping center, creating mutual benefits for both new and existing tenants. In order to
create an area large enough for the proposed new building and parking, Petitioner entered into
negotiations with the garden center tenant. Following the negotiations, the garden center tenant
agreed to a reduction in the size of the garden center, arrangements were made for truck ingress
and egress into the garden center through the existing parking lot, and a part of the fence
surrounding the garden center was moved so a small portion of the garden center acreage became
available for the new construction. As a result, approximately 0.498 acre of the shopping center
is available for construction of the new building and parking area (the "Leased Parcel").
Petitioner entered into negotiations with a prospective ground lessee of the Leased Parcel
and the parties are ready to enter into a ground lease for a term of more than 49 years. The
ground lessee would construct the new building and additional parking, but no option to
purchase would be included in the ground lease. With possible minor exceptions for specific
parking spots, the parking area of the Leased Parcel will be open to customers of the entire
shopping center and the currently existing shopping center parking area will be open to all

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customers of tenants of the Leased Parcel. When the construction is completed on the Leased
Parcel, the building, together with all of the buildings in the currently existing shopping center,
will share common parking with common entrances and exits. Uniform rules and regulations
will prevail with respect to all common areas. The Leased Parcel will be less than 50% of the
total rentable space of the shopping center, exclusive of common areas. In order to maintain a
proper mix of tenants and merchandise in the shopping center, most tenant leases in the new
building will include a variety of restrictive covenants prohibiting the sale of certain items.
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.
Section 1401(e) of the Tax Law provides, in part:
"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. . . .
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,

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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 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
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.
Opinion
As provided by section 1401(e) of the Tax Law and section 575.7(a) of the Regulations,
the creation of a ground lease for the Leased Parcel 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. Pursuant to the facts presented by Petitioner, conditions (1) and (2) are met for
the ground lease. Thus, to determine whether the ground lease is subject to tax, the issue at hand
is whether the ground lease is for substantially all of the premises constituting the real property.

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To make this determination, it is necessary to determine exactly what are the premises
constituting the real property under the facts presented. Section 575.7(a)(3) of the Regulations
provides that the term premises includes, but is not limited to, an individual building, an
individual condominium or cooperative unit, or any portion of vacant land. Here, 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.
In Harter, Secrest & Emery, LLP, Adv Op Comm T & F, September 27, 2005,
TSB-A-05(l)R, it was recognized that because a shopping center is operated by the landlord and
tenants as a closely integrated retail enterprise, the relevant premises must include all of the real
property constituting the shopping center. In reaching this conclusion, the opinion stated that
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), 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, the opinion looked to the United States Code (11 U.S.C. § 365)
and to 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), to determine that, historically, both
Congress and the courts have recognized the unique nature of shopping center lease
arrangements. That is, 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.
In the instant matter, the entire shopping center, including the Leased Parcel, will share
all public parking, which will be controlled by Petitioner, as landlord, in accordance with its
rules and regulations. Uniform rules and regulations will prevail with respect to all common
areas. Some tenants will have restrictive covenants prohibiting the sale of certain items, and the
entire shopping center will be operated as an integral unit for all of the retail tenants. The Leased
Parcel (including both the new building and the new parking) will constitute less than 90% of the
total rentable space available to all tenants in the entire shopping center, exclusive of common
areas. Accordingly, the ground lease for the Leased Parcel will not be for substantially all of the
premises constituting the real property and, therefore, no transfer tax will be due on execution of
the ground lease. See section 575.7(a)(3) of the Regulations.
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 this

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analysis is highly dependent on these particular facts, any determination of taxability based on
different fact patterns must be made on a case-by-case basis.

DATED: May 16, 2007

NOTE:

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

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the
person or entity fully and accurately describes all relevant facts. An
Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion.