I'm buying ~66 gas stations, then immediately conveying about 60 of those properties to a financing company and leasing them back on a 15-year triple-net lease with options to eventually buy some properties back at fair market value or a premium over the financing company's cost. Which of these steps -- my initial purchase, my sale to the financing company, and the leaseback itself -- are subject to New York's Real Estate Transfer Tax, and do any exemptions (like the 'mere change of form' or 'securing a debt' exemptions) apply?

Plain-English summary

The petitioner planned three closely-linked, same-day transactions: (1) purchase approximately 66 gas stations (fee and leasehold real estate, plus equipment, inventory, and assigned supply contracts) from a seller; (2) immediately convey the real estate for about 60 of those stations to a financing company ("Realty Company"); and (3) immediately lease that real estate back from Realty Company on a 15-year triple-net lease with three 10-year extension options, CPI-indexed rent escalations, and rights to eventually repurchase some fee properties at the greater of fair market value or 110%-130% of Realty Company's acquisition cost. Because the deeds from seller to petitioner and from petitioner to Realty Company were dated the same day, the petitioner would hold legal title for only a moment. The parties intended Realty Company, not petitioner, to be treated as the real owner for accounting, state law, regulatory, and federal income tax purposes — only Realty Company would benefit from appreciation, be able to sell the property, or claim it as its own asset.

Transaction one — the initial purchase. RETT applies under Tax Law §1402(a) to the conveyance of the fee and leasehold real estate interests among the assets petitioner bought from the seller (the non-real-estate assets, like equipment and inventory, weren't addressed by this opinion). All conveyances are presumed taxable (Tax Law §1404(b)); the tax is paid by the seller (grantor), with the petitioner (grantee) becoming jointly and severally liable if the seller doesn't pay within 15 days.

Transaction two — petitioner's conveyance to Realty Company. This is a distinct, separately-analyzed conveyance. It does not qualify for the "mere change of form" exemption (Tax Law §1405(b)(6)) because petitioner didn't convey everything it received from the seller (it kept inventory, equipment, and other personal property), and because Realty Company — not petitioner — is treated as the real owner going forward for income tax and financial reporting purposes; there's a genuine change in beneficial ownership. It also doesn't qualify for the debt-security exemption (Tax Law §1405(b)(2)), which shields conveyances that are or were used to secure a debt: while Realty Company is effectively financing the deal and protecting its investment, the lease's terms — rent escalations tied to CPI rather than a fixed amortization schedule, a fair-market-value (not fixed payoff) purchase option price, a right-of-first-refusal price set unilaterally by Realty Company, and differences between what petitioner received in transaction one versus what it conveyed in transaction two — show this isn't primarily a financing device securing debt repayment. That said, because Realty Company paid no separate consideration to petitioner for this specific conveyance, there was no RETT actually due on transaction two under the facts as presented.

Transaction three — the leaseback with purchase option. This is where the ruling delivers its most consequential holding. An ordinary lease of 49 years or less (including renewals) without a purchase option would NOT be a taxable conveyance. But a purchase option granted together with the right to use and occupy real property IS treated as a conveyed interest in real property — and a lease coupled with a purchase option is a taxable conveyance regardless of the lease's term. Because the Lease reserves petitioner's option to buy back up to one-third (and later two-thirds) of the fee properties, the Lease itself is a taxable RETT conveyance, with consideration including the present value of the lease payments and any amounts paid for the purchase option — though the opinion doesn't quantify that consideration.

The right of first refusal (requiring Realty Company to first offer petitioner any third-party sale at Realty Company's chosen price) is treated differently: a right of first refusal is not itself an "interest in real property" under Tax Law §1401(f), so it is not, by itself, subject to RETT.

What this means for you

Every leg of a sale-leaseback is analyzed separately for RETT purposes

Don't assume a sale-leaseback structured to move quickly through an intermediate owner escapes tax on any step -- the initial acquisition, the sale into the leaseback vehicle, and the lease itself (if it carries a purchase option) can each independently trigger RETT.

A lease with ANY purchase option is a taxable conveyance, no matter how short the lease term

New York's general rule exempting leases of 49 years or less (with no purchase option) from RETT does NOT help you if the lease includes a purchase option -- even a purchase option exercisable only after 15+ years, and even one priced at fair market value rather than a bargain price, converts the whole lease into a taxable conveyance.

CPI-indexed rent and fair-market-value purchase pricing cut against the "securing a debt" exemption

If you want a sale-leaseback financing vehicle's conveyance to qualify for the debt-security exemption, structuring it with fixed amortization-style payments and a fixed payoff price (rather than market-indexed rent and fair-market-value buyback pricing) more closely tracks a genuine financing arrangement and is more likely to support that exemption.

A right of first refusal, unlike a purchase option, generally isn't independently taxable

If your lease or agreement gives you only a right to match a third-party offer (rather than a standing option to buy at a set formula), that provision by itself typically isn't treated as a taxable interest in real property -- unlike a purchase option, which is.

Common questions

Q: If a sale-leaseback's financing company pays no separate consideration for the property it receives, is that conveyance tax-free?
A: In this case, yes -- because there was no separate consideration paid for that specific conveyance, no RETT was actually due on it, even though the conveyance itself didn't qualify for either the mere-change-of-form or debt-security exemptions.

Q: Does a 15-year triple-net lease, by itself, trigger RETT?
A: Not by itself -- a lease of 49 years or less without a purchase option generally isn't a taxable conveyance. It's the COMBINATION of the lease with a purchase option (even one exercisable many years later) that makes the whole lease taxable.

Q: Is a right of first refusal to buy property the same as a purchase option for RETT purposes?
A: No -- a right of first refusal (which only lets you match a price the owner is willing to accept from someone else) is not treated as an "interest in real property" and isn't independently subject to RETT, unlike an actual purchase option.

Citations and references

Statutes and guidance:

• Tax Law §1402[a]
• Tax Law §1404[b]
• Tax Law §1401(e)
• Tax Law §1401(f)
• Tax Law §1404(a)
• Tax Law §1405(b)(6)
• Tax Law §1405(b)(2)
• 20 NYCRR §575(d)(i)
• 20 NYCRR §575.7(a)
• 20 NYCRR §575.7(c)
• 20 NYCRR §575.1(d)(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_5r.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-10(5)R
Real Estate Transfer Tax
November 24, 2010

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

PETITION NO. M101013D

On October 13, 2010, the Department of Taxation and Finance received a Petition for Advisory
Opinion from name redacted ( “Petitioner”), addess redacted. Petitioner asks whether the transactions
described in the petition are conveyances subject to the real estate transfer tax (RETT) imposed by Article
31 of the Tax Law and, if so, whether any of the exemptions provided under Article 31 would apply to
these transactions. We conclude that the transactions are conveyances subject to RETT and that no
exemptions apply.
Facts
Petitioner and Entity C ("Realty Company") are contemplating three interrelated transactions
whereby Petitioner, in the first transaction, will acquire approximately 66 gas stations from Entity B
("Seller"), and, in second and third transactions immediately following the first, convey to Realty
Company and then leaseback from Realty Company the real estate associated with approximately 60 of
such gas stations (collectively, the "Real Property"), with the Petitioner having a right under the lease,
exercisable in fifteen years, to repurchase some of the Real Property, and additional rights, potentially
exercisable at later dates, to repurchase the balance of the Real Property, in each case at prices not less
than fair market value of the properties so purchased.
According to the petition, the specifics of the transactions are as follows: Petitioner will purchase
approximately 66 gas stations from Entity B pursuant to a Sale and Purchase Agreement between
Petitioner and Seller (the "Purchase Agreement"). The purchase of these gas stations will consist of the
acquisition by Petitioner of the Real Property (both fee and leasehold), and also equipment, inventory and
other assets (e.g., gasoline, foodstuffs, etc.) that comprise the gas stations. Under the Purchase
Agreement, Seller will assign to Petitioner at closing the supply contracts that Seller currently has with
each of the independent operators of the approximately 66 gas stations. Seller and Petitioner have not
allocated any of the purchase price to those contracts.
Petitioner cannot self-finance the transactions described under the Purchase Agreement. Thus, as
part of a separate agreement (the "Separate Agreement") between Petitioner and Realty Company,
Petitioner and Realty Company have agreed to enter into a sale and leaseback of the Real Property (fee
and leasehold). Under the Separate Agreement, Petitioner will agree to sell the Real Property to Realty
Company. Realty Company will then immediately lease (or sublease) such Real Property back to
Petitioner. For contractual and regulatory reasons, Seller will not issue direct deeds for the Real Property
to Realty Company. Petitioner will retain any portion of the gas stations transferred by Seller to
Petitioner but not conveyed by Petitioner to Realty Company (e.g., inventory, equipment and certain
personal property including, but not limited to, underground storage tanks, supply contracts).
The lease between Petitioner and Realty Company (the "Lease”) will have an initial term of 15
years, with three 10 year extension options. The Lease will be fully "triple-net," meaning that as between
Petitioner and Realty Company, Petitioner will be fully responsible during the term of the Lease for the
maintenance, repair and operation of the gas stations, including utilities, real estate taxes, and property,

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casualty and premises liability insurance. The annual fixed rent payable under the Lease is subject to
escalation, based on the regional CPI, such adjustment to be made on each third anniversary of the
commencement date of the Lease, for the term of the Lease (inclusive of all extensions). The parties
intend that, for accounting, state law, regulatory, and federal income tax purposes: (i) the Lease will be
treated as a "true lease"; (ii) Realty Company will be treated as the owner of, and landlord with respect to,
the Real Property; and (iii) Petitioner will be treated as the tenant with respect to the Real Property.
The Lease will contain a right to purchase, exercisable in the future provided there is no default
under the Lease, under which Petitioner has the right, at the expiration of the initial term of the Lease, or
at the expiration of either of the first two 10 year extension terms, to purchase from Realty Company up
to one-third (by number) of the fee properties comprising the Real Property. If Petitioner exercises this
first right to purchase, then Petitioner is given a second right to purchase the remaining two-thirds of the
fee properties upon the expiration of the immediately succeeding extension term (e.g. after the first
extension term if Petitioner purchases one-third of the fee properties after the initial term, after the second
extension term if Petitioner purchases one-third of the fee properties after the first extension term). The
purchase price for each fee property will be an amount equal to the greater of the fair market value for the
highest and best use of such property (as determined by appraisal), or a percentage of Realty Company's
acquisition cost allocated to such property (such percentage ranging from 110% to 130% of Realty
Company's acquisition cost, depending on when the purchase right is exercised by Petitioner). After the
sale of a fee property pursuant to any exercise of the rights to purchase described above, the annual fixed
rent payable by Petitioner under the Lease will be reduced by a scheduled amount allocated to such
property.
The Petitioner states that only Realty Company will benefit from appreciation in the real
property, be able to sell the real property, and treat the real property as its own for income tax and
financial reporting purposes.
Distinct from the Petitioner's right to purchase in the future, if Realty Company elects to sell one
or more of the gas station properties under the Lease to a third party (other than as a result of an
unsolicited offer) at any time during the term of the Lease, it will be required to first offer to sell such
properties to Petitioner at a price determined by Realty Company. If Petitioner elects not to purchase the
properties at the price offered by Realty Company, then Realty Company may sell such properties as
desired, except that if Realty Company is willing to accept an offer for less than 90% of the price that was
first offered to Petitioner, then Realty Company will be obligated to re-offer the subject properties to
Petitioner for the lesser amount that it is willing to accept from the third party. Upon the sale of any gas
station property to Petitioner pursuant to this right of first offer, the annual fixed rent payable by
Petitioner under the Lease will be reduced by a scheduled amount allocated to such property.
It is contemplated that the transactions between Petitioner and Realty Company will close on the
same day as and immediately following the first transaction between Petitioner and Seller. Thus, Realty
Company will not acquire the Real Property, or lease the Real Property back to Petitioner, unless and
until closing occurs with respect to the transactions described in the Purchase Agreement. As such,
Petitioner will hold legal title to the Real Property for only a moment in time (because the deeds from
Seller to Petitioner with respect to the Real Property and the deeds from Petitioner to Realty Company
with respect to the Real Property will be dated the same day). The closings are intended to occur
simultaneously, although closing of the transactions described in the Purchase Agreement between Seller
and Petitioner is not contractually contingent upon closing of the transactions described in the Separate
Agreement between Petitioner and Realty Company.

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Analysis
Transaction one: In transaction one, Petitioner will purchase 66 gas stations from Seller. The
purchase of these gas stations will consist of the acquisition by Petitioner of the real property (both fee
and leasehold) and also non real estate assets that comprise the gas stations. This opinion does not
address the tax liability associated with the purchase of the non real estate assets.
RETT is “imposed on each conveyance of real property or interest therein” (Tax Law §1402[a]).
All conveyances are presumed subject to the tax (Tax Law §1404[b]). "Conveyance" means the transfer
or transfers of any interest in real property by any method, including but not limited to sale, exchange,
assignment, surrender, option, trust indenture, conveyance or transfer or acquisition of a controlling
interest in any entity with an interest in real property (Tax Law §1401(e)). In this case, “interest in the
real property” includes both title in fee and leasehold interests (Tax Law §1401(f)). Therefore, in
transaction one, RETT will be imposed on the conveyances of the interests in real property (i.e., the fee
and leasehold interests in the gas station real property).
RETT is paid by the grantor, in this case the Seller. If the grantor fails to pay the tax within 15
days after delivery of the deed, the grantee (in this case, the Petitioner) has the duty to pay the tax,
although the tax becomes the joint and several liability of the grantor and grantee (see Tax Law,
§1404(a)).
Transactions two and three: According to Petitioner, on the same day as and immediately
following the first transaction between Petitioner and Seller, Petitioner will convey to Realty Company
(transaction two) and leaseback from Realty Company (transaction three) the real estate associated with
approximately 60 of the 66 gas stations conveyed in transaction one.
The Lease between Petitioner and Realty Company will have an initial term of 15 years, with
three 10 year extension options. The Lease will be fully "triple-net" with the Petitioner obligated to pay
all expenses associated with the use and operation of the Property. The lease will include a purchase
option and a right of first refusal for the Petitioner. The parties intend that, for accounting, state law,
regulatory and federal income tax purposes, the Lease will be treated as a "true lease."
Transactions two and three are conveyances distinct from transaction one. This is shown by the
fact that Petitioner did not convey to Realty Company all the property it received from seller in
transaction one. In addition, Realty Company is treated as the owner of the property for income tax and
financial reporting purposes. Therefore, Transactions two and three are not exempt from RETT under
Tax Law §1405(b)(6), which excludes from the real estate transfer tax “[c]onveyances to effectuate a
mere change of identity or form of ownership or organization where there is no change in beneficial
ownership.”
Transactions Two and Three are also not exempt under Tax Law §1405(b)(2), which provides
that the tax “shall not apply to conveyances which are or were used to secure a debt or other obligation.”
While the Realty Company will provide funding to finance the acquisition of the Real Property, and in
many respects the transaction serves to protect the Realty Company’s investment in the transaction,
review of the lease terms does not support the conclusion that the conveyance will be used to secure the
obligation. Provisions relating to rent, rent escalations tied to a cost of living adjustment, fair market
value purchase price for the purchase option, purchase price for the right of first refusal set by the Realty
Company, and variances between the premises demised in transaction one and transaction two lead to the

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conclusion that the conveyance to Realty Company will not be primarily used to secure a debt or other
obligation.
Because there has been a conveyance of an interest or interests in real property, and the
conveyance is not exempt from taxation, RETT will be imposed in transaction two, “when the
consideration exceeds five hundred dollars…” (Tax Law §1402(a)). Consideration is governed by
§575(d)(1) of the RETT Regulations: “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 includes the cancellation or discharge of an indebtedness or
obligation. It also includes the amount of any mortgage, purchase money mortgage, lien or other
encumbrance, whether or not the underlying indebtedness is assumed or taken subject to” (20 NYCRR
§575(d)(i)). According to the Petition, there was no consideration given by the Realty Company to the
Petitioner for the second transaction. Based on this assumption, there is no RETT tax liability for the
conveyance of real property from Petitioner to Realty Company.
Transaction Three (The Lease with Purchase Option): In general, the creation of a lease for a
term that does not exceed 49 years, including renewals, without a purchase option, would not constitute a
taxable conveyance (Tax Law §1401(e); §575.7(a)). However, the option to purchase real property
contained in a lease is an interest in real property. The purchase option need not be presently exercisable
in order to be subject to RETT. 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.
The creation of a lease coupled with the granting of an option to purchase the real property is a
conveyance subject to the transfer tax, regardless of the term of the lease (see 20 NYCRR §575.7(c)).
In this case, the Petitioner at the time of conveyance will reserve the option to purchase,
exercisable after the initial 15 year term and provided there is no default under the Lease, up to one-third
(by number) of the fee properties comprising the Real Property. If Petitioner exercises this purchase
option, then Petitioner is given a second right to purchase the remaining two-thirds of the fee properties
upon the expiration of the immediately succeeding extension term. The purchase option is granted as part
of the agreement for the use and occupancy of the real property. The purchase price for each fee property
will be an amount equal to the greater of the fair market value for the highest and best use of such
property (as determined by appraisal), or a percentage of Realty Company's acquisition cost allocated to
such property (such percentage ranging from 110% to 130% of Realty Company's acquisition cost,
depending on when the purchase right is exercised by Petitioner). Accordingly, the Lease, which includes
the purchase option, will be a conveyance of an interest in real property that is subject to RETT.
Pursuant to 20 NYCRR §575.1(d)(2), “[i]n the case of a creation of a leasehold interest or the
granting of an option with use and occupancy of real property, consideration includes, but is not limited
to: (i) the present value of the rental and other payments attributable to the use and occupancy of the real
property or interest therein; (ii) the amount paid for an option to purchase or renew; and (iii) the present
value of rental or other payments attributable to the exercise of any option to renew.” Thus, Transaction
three is a taxable conveyance but no opinion is expressed herein regarding the amount of consideration
for the Lease transaction.
Right of First Refusal: The lease will contain a provision that if the Realty Company elects to
sell one or more of the gas station properties under the Lease to a third party during the term of the Lease,
it will be required to first offer to sell such properties to Petitioner at a price determined by Realty

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Company. A right of first refusal to purchase property is not an interest in real property (see Tax Law
§1401(f)) and such an agreement is not subject to RETT.

DATED: November 24, 2010

NOTE:

/S/
DANIEL SMIRLOCK
Deputy Commissioner and 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.