My company owns vacant land and will ground-lease it to an industrial development agency (IDA), which will sublease it back to me as its construction agent, financed by an IDA industrial revenue bond that I effectively repay through rent equal to the bond's debt service. Neither the IDA nor I have a purchase option, but title to the improvements reverts to me (as ground-lease landlord) when the ground lease ends. Can I include the capital improvement costs -- funded by the bond -- in my 'original purchase price' for gains-tax purposes when I eventually sell the completed building and land?

Plain-English summary

This tax no longer exists. New York's Real Property Transfer Gains Tax (former Article 31-B of the Tax Law) was a 10% tax on the GAIN from transferring New York real property where consideration was $1 million or more. It was repealed for any transfer occurring on or after June 15, 1996. This 1983 opinion is preserved here for historical and research value, not as current law -- issued just months after the tax itself took effect.

The Edgewater Company of Ulster proposed a classic industrial-development-agency (IDA) financing structure: Edgewater would own vacant land in fee, ground-lease it to an IDA, and the IDA would sublease the leasehold back to Edgewater while appointing Edgewater as its agent to construct a building on the site. Construction would be funded by an industrial revenue bond issued by the IDA under General Municipal Law § 856, with Edgewater's sublease "rent" set to exactly equal the bond's debt service payments -- the IDA's only source of revenue to pay down the bond. If Edgewater defaulted on those payments, bondholders could foreclose on both the IDA's leasehold and Edgewater's own fee estate. Neither the ground lease nor the sublease exceeded 49 years, and critically, NEITHER the IDA nor Edgewater held a purchase option -- instead, the ground lease simply provided that title to any improvements would automatically vest in Edgewater (the ground-lease landlord) once the ground lease terminated. Edgewater asked whether, when it eventually transferred the completed building and land, it could include the bond-financed construction costs in its "original purchase price" for gains-tax purposes.

The Department looked past the formal three-party lease/sublease/agency structure to its economic substance: the IDA, as a public benefit corporation under General Municipal Law § 856, had no opportunity for gain and no risk of loss in the deal -- its sole function was to provide low-cost financing by issuing tax-advantaged bonds and passing the debt service through as "rent." Edgewater, by contrast, made all the actual payments and bore all the economic risk. The Department concluded the true nature of the arrangement was a financing arrangement, not a real property transfer, and would be treated as such for gains-tax purposes. Consequently, Edgewater was considered the owner of the project throughout the IDA's involvement, with no taxable gains-tax event occurring until Edgewater later transferred its interest in the land or building to a party OTHER than the IDA. At that future transfer, Edgewater's original purchase price would be its cost of acquiring the land PLUS the cost of the capital improvements -- even though those improvements were technically built and initially "owned" through the IDA structure and financed by the bond.

What this means for you

Businesses using IDA industrial-revenue-bond financing to construct or improve real property

An IDA ground-lease/sublease/construction-agency structure used purely to access low-cost bond financing -- with no purchase option, no IDA risk of gain or loss, and improvement costs effectively borne entirely by the private company -- is treated as a financing arrangement, not a taxable transfer, for gains-tax purposes. You remain the tax owner of the project throughout.

Accountants tracking original purchase price through an IDA financing structure

Even though the improvements were nominally constructed for/by the IDA, their FULL cost is added to your original purchase price for the property once you eventually transfer it to a third party -- the IDA's involvement doesn't create a separate acquisition event or reset your cost basis.

Real estate and public-finance attorneys structuring similar IDA deals

The key factors the Department looked at were: (1) absence of any purchase option for either party, (2) the IDA bearing no economic risk (rent = exact debt service, nothing more), and (3) the private company bearing all payment risk and potential foreclosure exposure. A deal missing these features might be analyzed differently.

Common questions

Q: Does this IDA-financing-is-not-a-transfer rule still matter today?
A: Not under this specific repealed tax, though the underlying economic-substance-over-form principle for IDA financing arrangements may still be relevant to other current New York taxes -- check separately.

Q: Why did the absence of a purchase option matter to the analysis?
A: The Department's conclusion rested heavily on treating the whole arrangement as a financing mechanism where the IDA never had a real ownership stake to begin with -- an option to purchase might have suggested the IDA held a more substantial ownership interest that would need to be transferred back, rather than the automatic reversion actually used here.

Q: What if the Company later defaulted and bondholders foreclosed?
A: The opinion doesn't address the gains-tax consequences of an actual foreclosure -- it only addresses the ordinary-course scenario where Edgewater successfully completes the financing and later voluntarily transfers the property to a third party.

Q: Can another company using a similar IDA bond structure rely on this exact ruling?
A: No, apart from the repeal -- an Advisory Opinion binds the Department only as to the petitioner and facts presented, though the economic-substance analysis applied to IDA financing arrangements generally while the tax existed.

Citations and references

Statutes and regulations:

• former Tax Law § 1440.7 (definition of "transfer of real property")
• General Municipal Law § 856 (authorizes local jurisdictions to create industrial development agencies as public benefit corporations)
• General Municipal Law § 864(1) (IDA bonds are special obligations payable solely from project revenues, such as lease or rental payments)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1983.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a83_1m.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-83(1)M
Gains Tax
November 14, 1983

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. M831011A

On October 14, 1983 a Petition for Advisory Opinion was received from The Edgewater
Company of Ulster, Marine Midland Towers, 360 S. Warren Street, Syracuse, New York 13202.
The issue raised is whether the beneficiary of an industrial revenue bond financing (the
"Company") is able to include as part of the "original purchase price" as defined in Article 31-B of
the Tax Law (the "Gains Tax Law") the cost of capital improvements to real property constructed
by the Company as agent for the industrial development agency (the "IDA"), which capital
improvements were financed with the proceeds of an industrial revenue bond financing, when the
company later obtains fee ownership of the capital improvements and then transfers the building
together with the land.
Petitioner describes the transactions involved as follows:
"In the presently proposed structure of this transaction the Company would own fee simple
title to a parcel of vacant land (the "Land"). The Company would enter into a ground lease (the
"Ground Lease") with the IDA. The IDA in turn would enter into a sublease (the "Sublease") with
the Company pursuant to which the IDA would appoint the Company its agent in connection with
the construction of a building on the IDA's leasehold estate in and to the Land, said construction to
be financed with the proceeds of an industrial revenue bond issued by the IDA. Pursuant to the terms
of the Snblease the Company will pay to the IDA rent equal to the debt service payments due on the
IDA's bond. Such rental payments will be the IDA's only source of revenue to cover the debt service
on the bond, and upon any default by the Company in making such payments, the holder of the bond
would be able to foreclose on the IDA's leasehold estate under the Ground Lease and on the
Company's fee estate (which would be subjected to the lien of the Mortgage).
"The Ground Lease and the Sublease will both have terms, including options for renewals
which shall be less than 49 years and neither the IDA Under the Ground Lease nor the Company
under the Sublease will have an option to purchase either the Land or any of the improvements.
"The Ground Lease shall provide that title to any improvements constructed on the Land shall
automatically vest in the landlord upon the termination of the Ground Lease."
The agreements provide that the IDA is to "construct" the project with financing from an
industrial revenue bond. Repayment of the bond is contingent upon the payment of the "rent" by the
Company. If the Company fails to make the "rental" payments when due, the bondholders may
declare the repayment of the bond to be in default and foreclose on the Company's fee estate as well

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

2
TSB-A-83(1)M
Gains Tax
November 14, 1983

as the IDA's leasehold estate under the Ground Lease. The effect of the agreements is that the
Company makes all the payments on the bonds and assumes all the risk of loss.
Section 856 of the General Municipal Law authorizes local jurisdictions to create industrial
development agencies. An IDA is declared a corporate governmental agency, constituting a public
benefit corporation. The IDA is authorized by law to issue bonds to raise the required capital for
projects it has determined to be for the public benefit. Subsection (1) of section 864 of the General
Municipal Law states, in party that "the bonds of every issue shall be special obligations of the
agency payable solely from revenues derived from the leasing, sale, or other disposition of a project,
. . ."
Thus, the IDA's involvement in a project is to provide low-cost financing for such project by
issuing bonds and structuring the agreement with the Company's rental or lease payments equal the
debt service payments due on the bonds. The IDA does not have any opportunity for gain, nor any
risk of loss. As a public corporation, the IDA is considered an exempt organization; it does not enter
into a project for the purpose of obtaining tax benefits for itself, although certain tax benefits flow
by virtue of its being an exempt organization or are statutorily conferred in subsection 1 of section
864 of the General Municipal Law. The substance of the agreements between the IDA and the
Company, when viewed in their entirety and in light of the statutory authorization for IDA's, indicate
that the true nature of the transaction is that of a financing arrangement, and it will be viewed as such
for gains tax purposes.
Accordingly, in the transaction described herein, the Company will be considered the owner
of the project, such that there will not be a taxable event for gains tax purposes until the Company
transfers its interest in the land or building to a party other than the IDA. When such transfer occurs,
the original purchase price of the feee interest in the land and building to the company-transferor will
be its cost of acquisition of the land plus the cost of the capital improvements.

DATED: November 4, 1983

s/FRANK J. PUCCIA
Director
Technical Services Bureau