A CUNY law school is buying a condominium unit and financing the purchase with bond proceeds through a wholly-owned nonprofit financing subsidiary -- the school will convey the property to the subsidiary, lease it back, and both entities will assign the lease and rents to a bond trustee as security. Since both the school and its subsidiary are New York State instrumentalities, are any of these conveyances or the mortgage-recording-tax-triggering rent assignment taxable?

Plain-English summary

A New York State instrumentality (a CUNY entity) planned to purchase a commercial condominium unit in Long Island City as a new home for its law school, financing the purchase and renovation with a combination of federally-taxable Build America Bonds and/or tax-exempt governmental bonds. To carry out the financing, once the petitioner acquired title, it planned to convey fee title to the CUNY Financing Corporation ("CFC") — a nonprofit corporation wholly controlled by the petitioner (which appoints CFC's board) and created specifically to acquire, develop, and lease the premises back to the petitioner, issue the bonds in CFC's own name on the petitioner's behalf, and repay the bonds solely from rent the petitioner would pay to CFC. Under the lease, the petitioner would keep exclusive possession throughout, remain liable for all mortgage debt and other property-related obligations, pay rent sized to cover CFC's bond debt service and operating costs, and hold an option to buy the property back from CFC once the bonds were fully repaid. To secure the bonds, both the petitioner and CFC would assign their rights in the lease and the rental income to a trustee for the bondholders.

The Department's analysis addressed two separate taxes. On the Real Estate Transfer Tax (RETT): Tax Law §1405, together with 20 NYCRR §575.9(b)(1), exempts the State of New York and its agencies, instrumentalities, political subdivisions, and public corporations from RETT. Because both the petitioner and CFC are instrumentalities of New York State, the conveyance of the premises from the petitioner to CFC — and any conveyance back — fall within this immunity under Tax Law §§1405(a)(1) and (b)(1), which extend the exemption regardless of whether the state instrumentality is acting as grantor or grantee, consistent with the Department's own prior opinion TSB-A-86(1)M.

On the Mortgage Recording Tax (MRT): Article 11 of the Tax Law taxes the recording of mortgages based on the secured debt (Tax Law §253), and the statutory definition of "mortgage" specifically includes an assignment of rents given as security for a debt, at least for property in cities of 1 million or more population (Tax Law §250(2)(a)) — which would otherwise make the petitioner's and CFC's rent assignment to the bond trustee taxable. But state agencies enjoy a separate, common-law immunity from taxation (independent of the MRT statute's own listed exemptions) for property used in the public interest, on the theory that taxing a mortgage held by (or securing an obligation of) a state agency is effectively a tax on the agency itself — a taxation the Legislature hasn't expressly waived here. The Department accordingly held the rent assignment is exempt from both the state MRT and New York City's local MRT (administered under the same statutory framework as the state tax).

What this means for you

Conduit bond financing through a wholly-owned nonprofit subsidiary doesn't cost a state instrumentality RETT or MRT

If a state agency or instrumentality structures conduit bond financing by conveying property to its own wholly-controlled nonprofit financing subsidiary and leasing it back, both the property conveyance and the security assignment of leases/rents to the bond trustee can be exempt from RETT and MRT — as long as both entities genuinely qualify as instrumentalities of the state.

Governmental immunity from MRT is broader than the statute's own listed exemptions

The Department relied on common-law sovereign immunity for property used in the public interest, not just the MRT statute's enumerated exemptions (Tax Law §§252, 252-a, 253(3)) — meaning even transactions that don't fit a specific statutory carve-out can still be tax-exempt if a genuine state instrumentality is involved and the Legislature hasn't expressly waived that immunity.

The exemption applies to both the private-party-to-instrumentality leg and the instrumentality-to-subsidiary leg

Two separate conveyances are contemplated here (into the instrumentality, then from the instrumentality to its financing subsidiary), and this ruling confirms both are protected — the immunity isn't limited to just the first conveyance into government hands.

Common questions

Q: Does a nonprofit financing subsidiary need to be a government entity itself to get this exemption, or just wholly controlled by one?
A: Based on this ruling's facts, the subsidiary (CFC) itself qualified as an instrumentality of New York State -- it wasn't merely "controlled by" the government but was independently recognized as a state instrumentality, which is what triggered the immunity for conveyances to and from it.

Q: Is an assignment of rents as loan security always subject to Mortgage Recording Tax?
A: Generally yes for property in a city with 1 million or more population (Tax Law §250(2)(a) treats such assignments as a taxable "mortgage"), unless a specific or common-law exemption applies -- as it did here for a state instrumentality's financing structure.

Q: Does this exemption also cover New York City's local Mortgage Recording Tax, or only the state-level tax?
A: Both -- the opinion confirms the NYC MRT, administered under the same statutory framework as the state MRT (Tax Law §§253 and 255), is exempt on the same governmental-immunity grounds.

Citations and references

Statutes, guidance, and case law:

• Tax Law §1405
• 20 NYCRR §575.9(b)(1)
• Tax Law §§1405(a)(1) and (b)(1)
• 20 NYCRR §575.9(c)
• TSB-A-86(1)M (August 22, 1986)
• Tax Law §253
• Tax Law §250(2)(a)
• Tax Law §§252, 252-a, 253(3)
• 20 NYCRR §644.1(a)(1)
• City of New York v. Tully, 86 A.D.2d 330, 451 N.Y.S.2d 261 (3d Dept. 1982)
• N.Y.C. Admin. Code §11-2603

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_2010.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a10_1r.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-10(1)R
Real Estate Transfer Tax
Mortgage Recording Tax
March 19, 2010

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M100218A

The Petitioner, name redacted (Petitioner), asks whether certain real estate conveyances to Petitioner
or Petitioner’s wholly-owned subsidiaries are subject to the real estate transfer tax (RETT) or the mortgage
recording taxes (MRT). We conclude that the below described conveyances to Petitioner or subsidiaries of
Petitioner are exempt from RETT. We also conclude that the recording of an assignment of leases and rents
by Petitioner or Petitioner’s wholly-owned subsidiaries is exempt from MRT.
Facts
Petitioner expects to purchase a commercial condominium unit in Long Island City (the Premises) as
the CUNY Law School’s new home. In order to finance the purchase and renovation of the Premises,
Petitioner plans to use proceeds from a combination of federally-taxable Build America bond and/or taxexempt governmental bond issues. In order to finance the project, once Petitioner is conveyed title to the
condominium, Petitioner expects to convey fee title to the CUNY Financing Corporation (CFC), a Type C
not for profit corporation controlled by Petitioner. Petitioner will be the sole member of CFC and therefore
appoint CFC’s Board of Directors. The CFC Certificate of Incorporation specifies that it shall be CFC’s
purpose to acquire, develop, equip and lease the premises to Petitioner to operate the Law School, to issue
bonds in the name of CFC on behalf of Petitioner to finance the project, and to repay the Bonds solely with
monies paid by Petitioner to CFC as rent for the Premises. Petitioner and CFC will enter into a lease
agreement, the term ending with the full repayment of the bonds, with Petitioner required to pay rent to CFC
during the term in an amount sufficient to pay the principal and interest payable by CFC on the bonds,
together with any other operation and maintenance costs of the Premises. According to Petitioner, all of the
benefits and burdens of ownership will remain with Petitioner at all times. Petitioner will remain liable for all
indebtedness and for all obligations secured by mortgages on the Premises. In addition, Petitioner will
remain liable for all other expenses associated with the Premises. The Lease will provide that, during the
term, Petitioner will have exclusive possession of the Premises, with an option to purchase the Premises from
CFC upon payment by Petitioner of amounts due on the outstanding bonds. Both Petitioner and its wholly
owned subsidiary CFC are instrumentalities of New York State. To secure payment of principal and interest
on the Bonds, Petitioner and CFC will assign all their rights and interest in the lease of the premises and the
rents payable to a trustee for the bondholders.
Analysis
Real Estate Transfer Tax (RETT): Petitioner asks whether the anticipated conveyance of the
Premises by an otherwise taxable private party to Petitioner and Petitioner’s subsequent transfer to CFC are
exempt from RETT. RETT is imposed on each conveyance of real property or interest therein, when the
consideration exceeds $500. Certain governmental organizations or entities are exempt from the payment of
RETT, including the state of New York and any of its agencies, instrumentalities, political subdivisions, or
public corporations (see Tax Law §1405; 20 NYCRR §575.9(b)(1)). The conveyances of the Premises
between Petitioner and CFC are not subject to RETT, since both Petitioner and CFC are instrumentalities of
the State of New York and therefore immune from taxation in this case (Tax Law §§1405(a)(1) and (b)(1);
20 NYCRR §575.9(c); see also Ad Op Comm T&F, TSB-A-86(1)M), August 22, 1986.

-2-

TSB-A-10(1)R
Real Estate Transfer Tax
Mortgage Recording Tax
March 19, 2010

Mortgage Recording Tax (MRT): Petitioner asks whether an assignment of leases and rents given by
CFC and Petitioner with respect to the Premises financing is exempt from MRT. Article 11 of the Tax Law
imposes taxes on the recording of mortgages on real property, based on the principal debt or obligation
secured by the mortgage being recorded (Tax Law §253). The term “mortgage” includes an assignment of
rents to accrue from tenancies, sub-tenancies, leases or subleases, given as security for an indebtedness, but
only with respect to real property located within any city in New York State having a population of one
million or more (Tax Law §250(2)(a)).
The MRT statute enumerates certain exemptions (Tax Law §§252, 252-a, 253(3)) but some other
exemptions arise under the common law. It is well established that State agencies enjoy immunity from
taxation, independent of the statutory exemptions, for property used in the public interest, on the theory that
imposition of a tax on a mortgage held by a State agency is tantamount to a tax on the agency itself in
violation of its immunity from taxation. Petitioner, as an instrumentality of the state of New York, is
generally immune from all taxation, unless the immunity is expressly waived by the State Legislature.
Accordingly, the recording of the assignment of rents by Petitioner and CFC is exempt from MRT (see 20
NYCRR §644.1(a)(1); TSB-A-86(1)M, August 22, 1986; City of New York v. Tully, 86 AD2d 330, 451
NYS2d 261 (3d Dept., 1982)). The assignment of rents is also exempt from the New York City MRT.
Taxes imposed under Chapter 26 of Article 11 of the New York City Administrative Code are administered
and collected in the same manner as the taxes imposed under §§253 and 255 of the Tax Law (see Admin.
Code § 11-2603).

DATED: March 19, 2010

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

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.