My 1982 lease and companion interim lease with a tenant, both signed before the gains tax's March 28, 1983 grandfather cutoff, contain purchase options and have been amended several times since. We now want to fix a firm commencement date for the main lease and separately convert the interim lease into essentially a full net lease with the purchase option removed, plus have the tenant take over certain operating responsibilities in exchange for a lump-sum payment. Do any of these amendments cause us to lose the pre-1983 grandfather exemption, and does the lump-sum payment or the interim-lease conversion itself count as a taxable transfer?

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 It was repealed for any transfer occurring on or after June 15, 1996.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 1985 opinion is preserved here for historical and research value, not as current law.

52 Habitat Co. owned an office building in New York City and, as landlord, had entered into two related June 30, 1982 leases with Morgan Guaranty Trust Company as tenant: a "Net Lease" starting once the existing tenant fully vacated, and a companion "Interim Lease" taking effect in stages as space was vacated in the meantime. Both leases -- predating the gains tax's March 28, 1983 grandfather cutoff -- contained purchase options (the Interim Lease's exercisable 2001-2003, the Net Lease's during its 15th-17th years), and both had already been amended several times by 1985. The parties now proposed: (1) a Commencement Date Agreement fixing the Net Lease's start date at January 1, 1987 regardless of whether the existing tenant had fully vacated; and (2) a Modification Agreement converting the Interim Lease (for an August 1985-December 1986 "Modification Period") into essentially a full net lease incorporating most of the Net Lease's terms, terminating the Interim Lease's own purchase option, leasing the whole building to Morgan (subject to the existing tenant's remaining occupancy), assigning 52 Habitat's rights under the existing tenant's lease to Morgan, and having Morgan take over certain operating responsibilities (like real estate taxes and operating expenses) in exchange for a $985,000 lump-sum reimbursement from the landlord, discounted at 1% per month.

The Department addressed four specific questions raised by 52 Habitat: FIRST, did the Commencement Date Agreement's amendments cause the Net Lease and its option to lose their pre-March 1983 grandfather exemption under former Tax Law § 1443.6? No -- per the Department's established rule (Publication 588, Q&A #21A) that a grandfathered pre-1983 contract keeps its exemption through amendments that are non-substantial, and fixing a commencement date (which cascades to fix all other time periods measured from it) was found non-substantial. SECOND, did the Modification Agreement's changes to the Interim Lease (including cancelling its option) trigger a taxable "transfer of real property" under former § 1440.7? The Modification Agreement's amendments WERE substantial, but of all the resulting changes, only the assignment of 52 Habitat's interest in the existing tenant's lease actually qualified as a "transfer of real property" requiring gains tax filings -- the broader lease conversion itself did not. THIRD, was the $985,000 payment "payment for an interest in real property" under former § 1440.4? No -- it was purely a discounted advance reimbursement for costs and expenses Morgan would incur taking over property operations, not consideration for a real property interest. FOURTH, did the EARLIER Net Lease amendments (from 1982-1984) modify its purchase option enough to count as granting a brand-new option? No -- those earlier amendments did not substantially modify the existing purchase option.

What this means for you

Landlords and tenants managing long-running, multiply-amended leases with grandfathered purchase options

Not every amendment threatens grandfathered status -- fixing a firm commencement date (even years after the original lease, and even affecting other lease timelines derived from it) was treated as non-substantial. But converting an interim/temporary lease into essentially a permanent full net lease, while cancelling its own purchase option, crossed the line into a substantial amendment.

Real estate attorneys drafting lease modification and cost-reimbursement agreements

A lump-sum payment compensating a tenant for taking over the landlord's operating obligations (taxes, expenses) is not automatically "consideration for real property" just because it's tied to a lease restructuring -- the Department looked at what the payment was actually FOR (reimbursing operating costs, not buying an interest in the property).

Accountants tracking which pieces of a multi-part lease restructuring actually trigger a taxable transfer

Even when an overall restructuring agreement is "substantial" and thus loses grandfather protection, only the SPECIFIC piece that independently meets the statutory definition of a "transfer of real property" (here, the assignment of rights under the existing tenant's lease) actually requires gains tax filings -- not every provision in the broader modification agreement.

Common questions

Q: Does this grandfather-exemption / substantial-amendment analysis still matter today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996.

Q: Why was fixing the commencement date "non-substantial" but converting the Interim Lease was "substantial"?
A: The Department distinguished between administratively pinning down a date already contemplated by the original 1982 agreements (non-substantial) versus fundamentally restructuring the Interim Lease's character -- extending its scope, cancelling its own purchase option, and having the tenant assume the landlord's operating role (substantial).

Q: If the Modification Agreement was substantial, why wasn't the whole thing taxed?
A: Because "substantial amendment" only determines whether GRANDFATHER protection survives -- it doesn't automatically make every resulting change a taxable "transfer of real property." The Department still had to separately ask whether each specific change (the lease conversion itself, the assignment of the existing tenant's lease, the $985,000 payment) independently met the statutory transfer definition; only the assignment did.

Q: Can another landlord/tenant pair with a similarly amended pre-1983 lease 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 underlying substantial-vs-nonsubstantial-amendment framework (Publication 588, Q&A #21A) applied generally while the tax existed.

Citations and references

Statutes, regulations, and guidance:

• former Tax Law § 1443.6 (grandfather exemption for transfers made pursuant to a contract entered into on or before March 28, 1983)
• former Tax Law § 1440.7 (definition of "transfer of real property")
• former Tax Law § 1440.4 (definition of consideration)
• Publication 588, Q&A #21A (a grandfathered pre-1983 contract retains the exemption through amendments that are non-substantial in nature)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a85_3r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (3) R
Real Property Transfer
Gains Tax
August 8, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
MODIFIED ADVISORY OPINION

PETITION NO. M850305A

On March 7, 1985, a Petition for an Advisory Opinion was received from 52 Habitat Co. c/o
Jack Resnick & Sons, Inc., 110 East 59th Street, New York, New York 10022.
The issues raised concern the application of the Real Property Transfer Gains Tax imposed
by Article 31-B of the Tax Law (hereinafter the "gains tax") to the following factual situation.
Petitioner is the owner of certain real property (hereinafter the "Property") and the building
located thereon (hereinafter the "Building") in New York City (the Property and the Building being
hereinafter collectively referred to as the "Premises"). Petitioner, as landlord, and Morgan Guaranty
Trust Company of New York (hereinafter "Morgan"), as tenant, are parties to a certain lease, dated
as of June 30, 1982 (hereinafter the "Net Lease"), the term of which is to commence the day after
the existing tenant (hereinafter the "Existing Tenant") completely vacates the Building, and a
companion lease, dated as of June 30, 1982 (hereinafter the "Interim Lease"), the term of which
began in 1982 and which takes effect in stages as spaces in the Building are vacated by the Existing
Tenant. Both the Net Lease and the Interim Lease contain options in favor of Morgan to purchase
the Premises, exercisable with respect to the Interim Lease during the period of January 1, 2001
through December 31, 2003 (provided the Interim Lease is still in effect), and with respect to the
Net Lease, during the 15th, 16th and 17th years of the term of the Net Lease.
A memorandum of the Net Lease and a memorandum of the Interim Lease were recorded in
the Office of the Register of the City of New York on July 6, 1982. The recorded memoranda of
both the Net Lease and the Interim Lease refer to the option to purchase.
Both leases have been amended at various times by agreements. The Interim Lease was
amended by agreements dated as of June 30, 1982, December 21, 1982, as of February 28, 1983,
April 21, 1983, May 6, 1983, January 12, 1984, December 28, 1984, and January 31, 1985. The Net
Lease was amended by the above mentioned agreements dated as of June 30, 1982, May 6, 1983 and
December 28, 1984.
The principal amendment made to the Net Lease by the agreement dated May 6, 1983 was
to allow the total annual payment of principal and interest due under the mortgage referred to therein
to exceed the fixed rent due under the Net Lease for the same annual period. This change was made
to enable the Petitioner to consummate a mortgage for which the Petitioner had received a
commitment from a particular lender. The principal amendment made by the December 28, 1984
agreement to the Net Lease was to provide that the foregoing amendment made by the May 6
agreement became null and void upon the consummation of a subsequent mortgage, which mortgage
has been consummated.

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

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

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TSB-A-85 (3) R
Real Property Transfer
Gains Tax
August 8, 1985
Petitioner and Morgan propose to further amend the Interim Lease pursuant to a modification
agreement (hereinafter the "Modification Agreement") which will incorporate, (with certain
exceptions including the option to purchase contained in the Net Lease) all of the terms, covenants
and conditions of the Net Lease. The Modification Agreement will amend the Interim Lease for the
period from August 1, 1985 to December 31, 1986 (hereinafter the "Modification Period"). Further,
the Modification Agreement will terminate the option to purchase contained in the Interim Lease.
In addition to converting the Interim Lease into a net lease effective August 1, 1985, the
Modification Agreement will act to lease the entire Building to Morgan subject to the Existing
Tenant's occupancy of certain space, and assign to Morgan Petitioner's right, title and interest under
the lease between Petitioner and the Existing Tenant covering those specified areas of the Building
still occupied by the Existing Tenant, and several service contracts applicable to the Building and
which obligations Morgan will assume. The Modification Agreement also contains various
representations by Petitioner in favor of Morgan with respect to the lease with the Existing Tenant
and sets forth an agreement between Petitioner and Morgan in connection with the assumption by
Morgan of the management of the Building. As consideration for Morgan assuming certain
responsibilities for the operation of the Premises prior to the commencement of the Net Lease (such
as payment of real estate taxes and operating expenses) which otherwise would have been
Petitioner's obligation, Petitioner will pay Morgan the amount of $985,000 (assuming the effective
date of the Modification Agreement is August 1, 1985). This amount is a discounted advance
reimbursement to Morgan for the costs and expenses to be so incurred by Morgan, discounted at a
rate of 1 percent per month, and is designed to put Morgan and Petitioner in the same financial
position in which they would have been had the Modification Agreement not been executed.
Finally, Petitioner and Morgan propose to enter into a Commencement Date Agreement pursuant to
which the commencement date of the term of the Net Lease will be fixed as January 1, 1987,
notwithstanding that all of the space occupied by the Existing Tenant may not yet have been vacated.
January 1, 1987 was a possible commencement date for the Net Lease prior to its amendment by the
Commencement Date Agreement.
The principal amendment made by the Commencement Date Agreement to the Net Lease is to fix
the commencement of the Net Lease and, thus, to fix all other time periods in the Net Lease which
are measured from such date, including the option period, the rent adjustment periods and the
renewal periods.
The specific gains tax issues raised by Petitioner with respect to this transaction, and the
issues which this opinion is intended to address are as follows:

1. Would the amendments made by the Commencement Date Agreement to the Net Lease
   cause the Net Lease and the option contained therein to lose their identity as contracts entered into
   on or before March 28, 1983 within the meaning of 1443.6 of the Tax Law (hereinafter the
   "grandfather exemption")?

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TSB-A-85 (3) R
Real Property Transfer
Gains Tax
August 8, 1985

2. Would the amendment of the Interim Lease by the Modification Agreement (including
   the cancellation of the option contained therein) result in a transfer of real property, as defined at
   1440.7 of the Tax Law, from the Petitioner to Morgan?
3. Is the $985,000 payment by Petitioner to Morgan payment for an interest in real property?
4. Did the amendments made to the Net Lease by the prior agreements dated as of June 30,
   1982, May 6, 1983 and December 28, 1984 modify the option contained therein to the extent that
   a new option was granted?
   Section 1443.6 of the Tax Law exempts transfers of real property that occur after the
   effective date of the gains tax if the transfer is made pursuant to a contract entered into on or before
   March 28, 1983. The Department of Taxation and Finance has ruled that a contract entered into on
   or before March 28, 1983, which is amended after such date will continue to benefit from the
   grandfather exemption as long as the amendments are of a non-substantial nature (Publication 588
   Q&A #21A).
   The amendments made by the Commencement Date Agreement to the Net Lease and the
   option contained therein do not constitute a substantial amendment of the Net Lease or the option.
   Accordingly, the Commencement Date Agreement would not cause the Net Lease nor the eventual
   transfer of the Premises pursuant to the option in the Net Lease to lose the benefit of the grandfather
   exemption.
   The amendments made to the Interim Lease by the Modification Agreement are of a
   substantial nature. Of the transfers from the Petitioner to Morgan resulting from the Modification
   Agreement, only the assignment of Petitioner's interest in the Existing Tenant's lease is a transfer of
   real property within the meaning of 1440.7 of the Tax Law. Accordingly, the appropriate gains tax
   forms must be filed for this transfer of real property.
   The $985,000 payment provided for in the Modification Agreement, as a discounted advance
   reimbursement to Morgan for certain costs and expenses related to the operation of the Premises, is
   not payment for an interest in real property within the meaning of 1440.4 of the Tax Law.
   Finally, the amendments made to the Net Lease by the agreements dated as of June 30, 1982,
   May 6, 1983 and December 28, 1984 do not substantially modify the option to purchase contained
   in the Net Lease. Accordingly, these agreements do not grant a new option with respect to the Net
   Lease.

DATED: July 31, 1985

s/ANDREW F. MARCHESE
Chief of Advisory Opinions

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.