My partnership built an office building at 126 East 56th Street in two stages, finishing the base building in 1983 and completing individual tenant floor build-outs through 1985. Can I allocate construction-period interest, real property taxes, insurance, security, and specifically identified indirect project costs to each floor by square footage, for gains-tax original-purchase-price purposes?

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 It was repealed for any transfer occurring on or after June 15, 1996.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 1987 opinion is preserved here for historical and research value, not as current law.

Tower 56 Partners, a New York partnership, owned and leased an office building at 126 East 56th Street in New York City, financed by National Bank of North America (predecessor to National Westminster Bank USA). Construction began in June 1981 and proceeded in two stages: the first stage (foundation, shell, core, and lobby) was substantially complete by December 1983, evidenced by a temporary certificate of occupancy. The second stage -- fitting out individual leased floors to tenant specifications, including air-conditioning, sprinklers, flooring, lighting, and partitions -- began in January 1984 and was completed by September 1985. Because the building wasn't finished all at once, the Partnership proposed allocating construction-period interest, real property taxes, insurance, security, and specifically identified indirect project costs to each floor in proportion to that floor's share of total building square footage, through the date each floor's own construction ended.

This is the last of a small group of near-identical opinions issued in spring 1987 to different Manhattan office-building partnerships (all sharing the same 126 East 56th Street ownership/counsel address -- fittingly, this building itself), each raising the exact same allocation question for a different building under construction. As in the companion rulings, the Department confirmed that construction-period interest, taxes, insurance, security, and specifically identified indirect project costs are includible in the cost of a capital improvement under former 20 NYCRR § 590.16(d) (with general/administrative overhead, like corporate management salaries, always excluded), and ruled that because the regulations don't prescribe a specific staged-construction allocation method, the Partnership's proposed square-footage-based, floor-by-floor method would be accepted as proper so long as it results in an equitable allocation -- subject to former 20 NYCRR § 590.16(e)'s rule that costs stop accruing during any suspension of construction activity between stages.

What this means for you

Developers building out office space floor-by-floor for different tenants

When a building is completed in stages -- here, a base building finished in 1983 followed by tenant floor build-outs running through 1985 -- a floor-by-floor cost allocation tied to square footage was an acceptable way to determine original-purchase-price costs for gains-tax purposes, as long as the method was equitable.

Real estate accountants tracking capital-improvement costs during a phased construction project

Indirect project costs clearly tied to the specific project were includible; general corporate overhead was not, regardless of the allocation method chosen for staged construction.

Tax attorneys advising on multi-year, multi-tenant office build-out projects

This opinion completes a cluster of five near-identical 1986-87 rulings (see also TSB-A-87(4)R, 87(5)R, and 87(6)R) all reaching the same construction-cost-allocation conclusion for different Manhattan office towers -- useful as a settled, repeatedly-confirmed doctrine rather than a one-off result.

Common questions

Q: Does this construction-cost-allocation rule still matter today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996.

Q: Why are there so many nearly identical opinions on this exact question in 1986-87?
A: Several large Manhattan office landlords, apparently advised by the same counsel (all petitions list the same 126 East 56th Street address), sought the same ruling on the same construction-cost-allocation question for different buildings within a few months of each other -- a useful sign of how standardized phased-construction financing and leasing structures were in that era.

Q: What happens to costs incurred during a gap in construction?
A: They aren't included -- former 20 NYCRR § 590.16(e) treats a suspension of construction activity as ending the construction period for cost-accrual purposes during that gap.

Q: Can another developer completing a similar project 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 this doctrine was confirmed repeatedly across five near-identical 1986-87 rulings while the tax existed.

Citations and references

Statutes and regulations:

• former 20 NYCRR § 590.16(d) (construction-period interest, taxes, insurance, and specifically identified indirect project costs are includible in the cost of a capital improvement; general/administrative overhead costs are not)
• former 20 NYCRR § 590.16(e) (the construction period ends when the property is substantially complete and ready for use; for staged projects, allowable costs cease on each completed part; a suspension of construction activity ends the construction period for cost-accrual purposes)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a87_7r.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-87 (7) R
Real Property Transfer
Gains Tax
May 27, 1987

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. M870408A

On April 8, 1987, a Petition for Advisory Opinion was received on behalf of Tower 56
Partners, located at 126 East 56th Street, 30th Floor, New York, New York, 10022.
The issue raised is whether the method chosen by the Petitioner of computing the amount of
construction period interest, construction period real property taxes, insurance, security and
specifically identified indirect project costs, to be included in the original purchase price of a
building for the purpose of computing the Real Property Transfer Gains Tax imposed by Article 31B of the Tax Law (hereinafter the "Gains Tax") would be accepted by the Department of Taxation
and Finance (hereinafter the "Department").
The facts as presented are that the Petitioner, a New York partnership, owns an office
building (hereinafter the "Building") in New York City at 126 East 56th Street. Financing for the
construction of the Building was provided by National Bank of North America, predecessor to
National Westminster Bank USA. The Petitioner has leased and intends to continue to lease floors
of the Building to individual tenants.
Construction of the Building began in June 1981 and occurred in two stages: During the first
stage, the Building's foundation, shell (including external walls), core and lobby were substantially
completed, as evidenced by the issuance of a temporary certificate of occupancy. The first stage of
construction was substantially completed in December of 1983.
During the second stage, the Partnership entered into leases covering one or more floors with
individual tenants and completed construction of the leased floor(s) according to the particular
tenant's specifications. This second stage of construction included, as to each such floor, the
installation of air- conditioning ducts, sprinkler systems, flooring, ceiling, lighting, electrical and
telephone outlets, and any necessary partitions on the particular leased floor(s). The second stage
of construction began in January 1984 and was completed in September 1985.
Since construction of the Building was not completed at a single time, but rather on a floor
by floor basis, Petitioner proposes that for purposes of computing the original purchase price of the
Building, interest on loans incurred in connection with the construction of the Building, construction
period real property taxes, insurance, security and specifically identified indirect project costs be
allocated to a particular floor in proportion to the ratio of that floor's square footage to the Building's
total square footage and such amounts be included in the original purchase price of the Building to
the extent paid or accrued through the date that construction ended with respect to that particular
floor.

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

FRANK J. PUCCIA, DIRECTOR

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER

-2­
TSB-A-87 (7) R
Real Property Transfer
Gains Tax
May 27, 1987

Gains Tax regulations 590.16(d) in describing the costs to be included as costs of
constructing capital improvements states in pertinent part as follows:
(d)

Q.

What additional costs are allowed if incurred during a construction period?

A.

Other costs that are clearly associated with construction of a real estate
project can also be included as a cost of constructing a capital improvement.
If the capital improvement requires a construction period, a period of time in
which necessary activities are conducted to bring the improvement on the real
property to that state or condition necessary for its intended use, the interest
cost paid during that period on a construction loan, real property taxes,
insurance or similar items are includible as a cost of construction.

Also, section 590.16(d) of the Gains Tax regulations states in pertinent part as follows:
Indirect project costs may also be included in original purchase price if they are
specifically identified with a project. Indirect project costs are indirect costs incurred after
the acquisition of the property, such as construction administration costs, legal fees, and
various office costs (cost accounting expenses, design costs, and other expenses of
departments providing services to projects), that clearly relate to projects under construction.
The full amount of indirect project costs that clearly relate to a specific project, such as costs
associated with a field office at a project site and the administrative personnel that staff the
office, may be added to the cost of the capital improvement. However, indirect project costs
which relate to numerous projects must be allocated in a rational manner to the projects to
which the cost relate based on the nature of activity that gave rise to the costs.
Indirect project costs that do not clearly pertain to projects under construction and all
general and administrative costs cannot be added to the cost of capital improvement. General
and administrative costs include such costs as corporate management salaries, general
accounting expenses, corporate office expenses, general legal fees, and similar costs which
are generally incurred by all enterprises in the conduct of business.
In addition section 590.16(e) of the Gains Tax regulations states in pertinent part:
The construction period ends when the real property is substantially complete and
ready to be placed in service. Some construction projects are completed in sections, leaving
part of the real property capable of being used independently while construction continues
on other sections. For such projects, allowable construction period expenses shall cease on
each part when it is substantially complete and ready for use. A construction period for a
project may be suspended before a project is completed for various reasons, such as
insufficient sales or insufficient rental demands. In such a case, the construction period has
ended, and the costs allowed during a construction period will no longer be allowed.

-3­
TSB-A-87 (7) R
Real Property Transfer
Gains Tax
May 27, 1987

Based on the foregoing, the costs of interest on construction loans incurred in connection
with the construction of the Building, construction period real property taxes, insurance, security,
and specifically identified indirect project costs accruing during a construction period are allowed
as costs of constructing of a capital improvement. The method of allocating such costs in the case
of a construction project which is completed in steps is not specifically stated in the Gains Tax
regulations. However, the method chosen by the Petitioner of allocating such costs would be
deemed a proper method as long as it resulted in an equitable allocation.
Also, as provided at Section 590.16(e), if there is a suspension of the construction activity
between the end of the first stage of construction and the beginning of the second stage the costs
allowed during a construction period will no longer be allowed between such stages.

DATED: May 27, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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