My building is a not-for-profit Mitchell-Lama cooperative supervised by the state housing agency, with income limits and restrictions that prevent shareholders from selling at market value. A Voluntary Reconstitution Plan would convert us into a private, for-profit cooperative corporation, letting shareholders finally sell for full market value. Does converting from the Mitchell-Lama nonprofit structure to a private cooperative trigger New York's Real Estate Transfer Tax -- for the building itself, for the new shares issued to participating shareholders, and for shareholders who opt out instead?

Plain-English summary

A shareholder in a New York City residential cooperative operated on a not-for-profit basis under the Mitchell-Lama program (supervised by the state Division of Housing and Community Renewal, organized under Article II of the Private Housing Finance Law) asked about the transfer-tax consequences of a Voluntary Reconstitution Plan that would convert the building into a private, for-profit cooperative organized under the Business Corporation Law (BCL). Under Mitchell-Lama, shareholders can't realize the market value of their apartment interests on sale; the Plan would remove those restrictions, eliminate income-eligibility waiting lists, shift maintenance/assessment control to the new corporation, and let shareholders sell freely at market value. Existing shareholders could either exchange their old shares for new shares in the reconstituted corporation ("participants") or surrender their shares for a return of their Mitchell-Lama-valued equity, either remaining as tenants or vacating ("non-participants") — with non-participants' shares initially held by the new corporation and eventually resalable to investors.

The Department found multiple layers of RETT exposure. First, even though there's no conventional deed transfer to a new legal owner, dissolving the old Mitchell-Lama entity is legally required to escape its restrictions (PHFL §35(3)), and the resulting change in the financial benefits attached to the shares is substantive enough that the Department treated the conversion itself as a conveyance BY THE SPONSOR of the real property comprising the cooperative dwelling to the new cooperative housing corporation — taxable under Tax Law §1402(a). Consideration for this conveyance includes any cash the sponsor receives, existing mortgages/liens on the property, and the fair market value of the reconstituted corporation's shares. Normally a transaction that keeps the same ownership percentages might qualify for the Tax Law §1405(b)(6) "mere change of form" exemption — but that exemption expressly does NOT apply to conveyances of cooperative dwellings to a cooperative housing corporation, so this building-level conveyance is taxable regardless.

Second, the NEW shares issued to participating shareholders are treated as a separate "original conveyance" of cooperative stock (with an appurtenant proprietary lease), independently taxable. Unlike the building-level conveyance, THIS conveyance CAN qualify for the §1405(b)(6) mere-change exemption to the extent a participant's ownership percentage in the new corporation matches what they held before. Where it doesn't fully qualify, Tax Law §1405-B(a) provides a credit: a proportionate share of the tax already paid on the building-level conveyance (to the extent that conveyance was itself a mere change of form) can offset the tax on the new share issuance, calculated by a formula weighing the number of participant-held shares against the total shares outstanding.

Third, non-participants surrendering their old shares (along with agreeing to terminate their occupancy rights) in exchange for their Mitchell-Lama-valued equity trigger a taxable "subsequent conveyance" of cooperative stock to the sponsor, with consideration equal to the equity payment received. Fourth, when the sponsor later resells those non-participants' shares to outside investors, that sale is also subject to RETT. Finally, if any individual apartment's share conveyance involves $1 million or more, the additional 1% tax under Tax Law §1402-a(a) applies on top — again subject to the same mere-change exemption analysis.

What this means for you

A Mitchell-Lama-to-private-cooperative conversion is not RETT-free just because no deed changes hands

Even without a conventional sale, the Department treats the legally-required dissolution of the old restricted entity as a taxable conveyance of the underlying real property to the new cooperative corporation — the mere-change-of-form exemption is specifically unavailable for this building-level step because it involves a conveyance to a cooperative housing corporation.

Shareholders who stay in ("participants") get better tax treatment than those who cash out

Participating shareholders exchanging old shares for new ones at the same ownership percentage can benefit from the mere-change exemption (or a partial credit), while non-participants surrendering shares for equity, and any later resale of those shares to investors, are fully taxable "subsequent conveyances" with no such relief.

The available credit is prorated, not a full offset

The credit against tax on the new share issuance only equals the proportionate part of the building-level tax that represented a genuine mere change of form, multiplied by each participant's share of total outstanding stock -- plan sponsors and shareholders should not assume the credit eliminates the second layer of tax entirely.

Watch the $1 million threshold per apartment for the additional 1% tax

If any individual reconstituted apartment's share conveyance carries consideration of $1 million or more, the additional Mansion Tax under Tax Law §1402-a(a) applies on top of the ordinary RETT -- subject to the same mere-change exemption/credit analysis.

Common questions

Q: If our co-op board just amends its certificate of incorporation to exit Mitchell-Lama, without any traditional sale, do we still owe RETT?
A: Yes. Even though there's no conventional deed transfer, the Department treats the dissolution needed to exit Mitchell-Lama restrictions as a conveyance of the real property to the reconstituted cooperative housing corporation, taxable under Tax Law §1402(a).

Q: Do shareholders who keep the same ownership percentage in the new corporation avoid RETT on their new shares?
A: They may qualify for the Tax Law §1405(b)(6) mere-change exemption on the new share issuance specifically (unlike the building-level conveyance, which can't use that exemption) -- and where it doesn't fully apply, a credit against tax already paid on the building conveyance may offset part of the liability.

Q: What happens tax-wise to shareholders who choose not to participate and instead cash out their Mitchell-Lama equity?
A: Their share surrender is treated as a taxable subsequent conveyance of cooperative stock to the sponsor, with the equity payment received as the consideration -- and the sponsor's later resale of those shares to investors is separately taxable too.

Citations and references

Statutes and guidance:

• §1402(a) of the Tax Law
• §1402-(a)(a) of the Tax Law
• §1401(e) of the Tax Law
• §1401(d) of the Tax Law
• §1405(b)(6) of the Tax Law
• §1405-B(a) of the Tax Law
• §1402-a(a) of the Tax Law
• §35(3) of the PHFL
• 20 NYCRR §575.11(a)(12)
• 20 NYCRR §575.8(a)(1)
• 20 NYCRR §575.8(c)
• 20 NYCRR §575.8(a)(2)

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_2r.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-10(2)R
Real Estate Transfer Tax
April 29, 2010

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M090714A

The petition was filed by name redacted (“Petitioner”), a shareholder in a corporation that
operates a New York City residential cooperative apartment building under the supervision of the
New York State Division of Housing and Community Renewal (“DHCR”) on a not-for-profit basis for
persons who meet certain income eligibility requirements. She asks whether the New York State real
estate transfer tax (RETT) will be applicable if a Voluntary Reconstitution Plan to convert the building
into a private cooperative is executed.
We conclude that the conversion of the not-for-profit housing company (PHFL company) to a
private cooperative housing corporation (BCL corporation) constitutes a conveyance by the plan
sponsor of the real property comprising the cooperative dwelling, subject to the RETT. In addition,
upon conversion, the shares in the BCL corporation will be deemed to have been conveyed to the
shareholders of the PHFL company who have not opted out, as an original conveyance of shares in the
BCL corporation, and thus subject to the RETT. This conveyance may be exempt to the extent that
there is no change in beneficial ownership. To the extent that the conveyance does not qualify for the
exemption, it may qualify for a credit. The conveyance of stock to the PHFL company by
shareholders who elect not to participate in the BCL corporation will also be subject to the RETT.
Petitioner also asks how to calculate the RETT if liability for the tax is found, and that will be
discussed below.
Facts
Name of sponsor redacted (“the Sponsor”), organized under Article II of the Private Housing
Finance Law (“PHFL”), owns real property in New York City and operates the property under
supervision of the DHCR. As such, the property is subject to the rules and regulations of the MitchellLama program, which prevent shareholders of the Sponsor from realizing the market value of their
interest in the property upon its sale.
A Voluntary Reconstitution Plan (“the Plan”) to convert the Sponsor to private cooperative
ownership has been drafted. Under the Plan, the Sponsor would amend its existing Certificate of
Incorporation filed pursuant to the requirements of the PHFL, so that the resulting certificate of
incorporation complies with provisions of the Business Corporation Law (BCL). Upon withdrawal
from the Mitchell-Lama Program, the Sponsor would cease to be subject to the restrictions under the
PHFL. After the dissolution and reconstitution of the Sponsor, the cooperative housing corporation
would operate on a for-profit basis and have all the power and authority of a corporation formed under
the BCL. The waiting lists of income-eligible applicants would be eliminated, control over
maintenance and assessments would be transferred to the reconstituted corporation, and shareholders
would be free to sell their interests in the real property for market value, subject to certain conditions
commonly applied to co-operative housing sales. After the dissolution and reconstitution of the

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Real Estate Transfer Tax
April 29, 2010

Sponsor, the Sponsor would operate on a for-profit basis and have all the power and authority of a
corporation formed under the BCL.
After privatization, the share allocations of the Sponsor would be adjusted to reflect the value
of the apartments as determined by new criteria in the Plan. All shareholders of the Sponsor
immediately prior to privatization would have the right to exchange their existing shares for shares in
the reconstituted corporation allocated to their present apartment or, in the alternative, to surrender
their shares of the Sponsor and (i) remain as tenants under annual leases or (ii) vacate their apartment.
Those electing to rent or vacate (“non-participants”) will not receive the fair market value of shares in
the BCL corporation, but rather will receive a return of their equity as valued for purposes of the
PHFL company.1 All shares allocated to apartments occupied by non-participants will initially be
owned by the BCL corporation and may thereafter be sold to investors, subject to the non-participants’
leases.
Analysis
New York State imposes a tax (known as the real estate transfer tax or RETT) on each
conveyance of real property or interest therein when the consideration exceeds five hundred dollars or
a fractional part thereof.2 An additional tax is imposed on each conveyance of residential real property
or interest therein when the consideration for the entire conveyance is one million dollars or more.3 A
conveyance of real property or interest therein is not limited to a deed transfer, but includes 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 receiver, or transfer or
acquisition of a controlling interest in any entity with an interest in real property.4
While the ownership of the real property would not be conveyed in the conventional sense to a
newly formed corporation, there must be dissolution of the Sponsor in order to remove the restrictions
of the Mitchell-Lama Program.5 The dissolution and reconstitution will result in significant changes in
the financial benefits and restrictions appurtenant to the shares in the Sponsor prior to the conversion
and after the conversion. As a result, there is a substantive change in the nature of the ownership of
the entity that owns the property. Accordingly, the conversion from a PHFL company to a BCL
corporation constitutes a conveyance by the Sponsor to a cooperative housing corporation of the real
property comprising the cooperative dwelling, a transaction that is subject to the RETT under
§1402(a) of the Tax Law. The consideration for the conveyance is the amount of cash received by the
Sponsor; the amount of any mortgages, liens, or encumbrances on the real property; and the fair
market value of the shares in the cooperative housing corporation after reconstitution.6 In general, the
transaction described above would be deemed to constitute a mere change of identity or form of
ownership or organization to the extent that the ownership percentages of shares in the BCL
corporation for each apartment remained the same as the percentages in the PHFL company.
However, the exemption provided under §1405(b)(6) of the Tax Law for conveyances that effectuate a
1

See Rights of Existing Shareholders, p. 122 of The Plan.
§1402(a) of the Tax Law.
3
§1402-(a)(a) of the Tax Law.
4
§1401(e) of the Tax Law.
5
§35(3) of the PHFL.
6
20 NYCRR §575.11(a)(12).
2

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Real Estate Transfer Tax
April 29, 2010

mere change of identity or form of ownership or organization does not apply to conveyances to a
cooperative housing corporation of real property comprising the cooperative dwellings
In addition to the conveyance of the real property to the BCL corporation upon conversion
from a PHFL company to the BCL corporation, the shares in the BCL corporation will be deemed to
have been conveyed by the Sponsor to the shareholders of the PHFL company (those who have opted
to become shareholders in the reconstituted cooperative – “participants”) as an original conveyance of
shares representing each shareholder’s ownership interest in the BCL corporation, with an appurtenant
proprietary lease for each shareholder’s respective unit. This conveyance is also subject to the RETT.7
Consideration for each original conveyance of shares of stock in the BCL corporation means the price
actually paid or required to be paid for the real property, including payment for an option or contract to
purchase real property, the cancellation of debt or obligation, and the amount of any lien.8 However,
to the extent that the conveyance of the shares in the BCL corporation to the participating shareholders
of the PHFL company effects a mere change in the identity or form of ownership or organization
where there is no change in beneficial ownership, the mere change exemption under §1405(b)(6) of
the Tax Law may apply.
As previously noted the RETT applies to transfers by a sponsor to a cooperative housing
corporation of the real property comprising the cooperative dwellings, notwithstanding that there may
have been no change in beneficial ownership. In the case of the original conveyance of shares of stock
in a cooperative housing corporation in connection with the grant of a proprietary leasehold, however,
a credit is allowed. The credit is a proportionate part of the tax paid upon the conveyance of the real
property by the sponsor to the cooperative housing corporation against the tax imposed on the original
conveyance of shares of stock in the cooperative housing corporation in connection with the grant of a
proprietary lease.9 Thus, to the extent that the mere change rule is not otherwise applicable, any RETT
due on the original conveyance of shares in the BCL corporation to the Participants, in conjunction
with a proprietary lease, may be offset by a credit. The amount of the credit is determined by
multiplying the amount of tax paid upon the conveyance to the cooperative housing corporation by a
percentage representing the extent to which such conveyance effectuated a mere change of identity or
form of ownership, and then multiplying the resulting product by a fraction, the numerator of which
shall be the number of shares of stock conveyed by the BCL corporation with a proprietary lease for
the units, and the denominator of which shall be the total number of shares of stock of the cooperative
housing corporation, including any stock held by the corporation.
The conveyance to the PHFL company by non-participants of their shares in the company
prior to its conversion, along with their occupancy agreements that they agree to terminate, is
considered a subsequent conveyance of stock in a cooperative housing corporation, which is subject to
the RETT.10 The consideration for such subsequent transfers will be the equity payment received by
the non-participants.
The sale by the Sponsor of BCL shares allocated to the apartments of the non-participants is
also subject to the RETT.
7

20 NYCRR §575.8(a)(1).
§1401(d) of the Tax Law.
9
§1405-B(a) of the Tax Law and 20 NYCRR §575.8(c).
10
20 NYCRR §575.8(a)(2).
8

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TSB-A-10(2)R
Real Estate Transfer Tax
April 29, 2010

It should be noted that, pursuant to §1402-a(a) of the Tax Law, if the consideration for the
conveyance of shares related to an individual cooperative apartment unit is $1 million or more, the
conveyance will be subject to an additional 1% tax at the time of conveyance. However, as stated
above, the mere change exemption may apply if the conveyance effectuates a mere change of identity
or form of ownership or organization.

DATED: April 29, 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.