My shopping center lease, originally signed in the 1950s for 75 years, has about 37 years left. We're negotiating to add roughly 30 more years to the term along with a substantial rent increase, but with no purchase option. Does extending an already-long-running lease trigger New York's Real Property Transfer Gains Tax as if we were creating a brand-new 49-plus-year lease?

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 It was repealed for any transfer occurring on or after June 15, 1996.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.

Syosset Shopping Center Associates held a long-term ground lease, originally signed in the early 1950s for a 75-year term with roughly 37 years remaining, on land improved with a shopping center the tenant had built. The lessee proposed extending the lease by about 30 more years and substantially raising the rent for the remaining term, with no purchase option included. The tenant argued the extension shouldn't be taxable for two reasons: (1) the statute's language about "creation" of a leasehold shouldn't reach a mere extension of an existing lease, and the 30-year extension by itself was under the 49-year threshold; and (2) the statute's "substantial capital improvements" condition should be read to apply only to raw, unimproved land being developed by a tenant -- not routine improvements a tenant makes at an already-built shopping center.

The Department rejected both arguments. First, it held that substantially modifying an existing lease's term AND rent effectively creates a brand-new lease for gains-tax purposes -- the modification isn't a footnote to the old lease, it's treated as a fresh agreement whose leasehold term starts running from the modification's own effective date. Measured that way, the new lease term (roughly 30 added years, on top of what remained) comfortably exceeded the statute's 49-year threshold. Second, the Department found no legislative evidence limiting the capital-improvements condition to unimproved land, and the facts showed capital improvements had already been made -- and could continue to be made -- by or for the tenant's benefit at the built-out shopping center. Since the extended lease satisfied all three statutory conditions (over 49 years, substantial capital improvements, substantially all the premises), the extension agreement was a taxable transfer of real property.

What this means for you

Commercial tenants negotiating a lease extension with a substantial term and rent increase

Under this now-repealed tax, extending an existing long-term lease wasn't treated as a continuation of the old, possibly grandfathered lease -- a SUBSTANTIAL extension (in term and rent) created a brand-new lease, tested against the 49-year threshold as if it started on the day of the amendment.

Landlords and tenants at improved (not vacant) commercial properties

This opinion forecloses the argument that the gains tax's "substantial capital improvements" condition only applies to raw land -- it reaches ordinary tenant improvements at an already-developed property too, which matters for whether a shorter lease extension nonetheless satisfies all three conditions for a taxable leasehold.

Real estate attorneys distinguishing a "substantial" lease modification from a minor one

Contrast this opinion with TSB-A-88(2)R (also in this corpus), where the Department found that merely SETTING the rent for an already-provided-for renewal option, or granting an ADDITIONAL independent renewal option under 49 years on its own, was NOT a substantial modification -- the line between the two cases is whether the change actually extends and reprices the core lease term, versus operating within terms the original lease already contemplated.

Common questions

Q: Does this lease-extension rule still matter today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996. Current New York real estate taxes have their own separate rules for lease modifications.

Q: Why didn't it matter that the 30-year extension, by itself, was under 49 years?
A: Because the Department measured the NEW lease's full term (the extension plus whatever balance remained) from the modification's effective date -- not just the incremental years being added -- and that combined term exceeded 49 years.

Q: Could a small, non-substantial lease amendment have avoided this result?
A: Likely yes -- this opinion turned specifically on the SUBSTANTIAL nature of both the term extension and the rent increase; a minor administrative tweak wouldn't create a new lease for gains-tax purposes.

Q: Can another tenant negotiating a similar extension rely on this exact ruling?
A: No -- an Advisory Opinion binds the Department only as to the petitioner and facts presented, and (setting the repeal aside) this result depended on the specific scope of the term extension and rent increase described.

Citations and references

Statutes and regulations:

• former Tax Law § 1440.7 (a leasehold or sublease is a transfer of real property when: (i) the combined term plus renewal options exceeds 49 years, (ii) substantial capital improvements are or may be made by or for the lessee/sublessee, and (iii) the lease covers substantially all the premises)

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_8r.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-87 (8) R
Real Property Transfer
Gains Tax
September 14, 1987

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. M870518A

On May 18, 1987, a Petition for Advisory Opinion was received on behalf of Syosset
Shopping Center Associates located at Suite 305, 510 Broad Hollow Road, Melville, New York,
11747.
The issue raised by the Petitioner is whether an agreement to extend the term of an existing
lease coupled with an increase in the rent to be paid during the balance of the term of such lease
constitutes a transfer of an interest in real property for purposes of the Real Property Transfer Gain
Tax imposed by Article 31-B of the Tax Law (hereinafter the gains tax).
The facts as presented by Petitioner are as follows: Petitioner is the lessee on a long-term
lease that was originally executed in the early nineteen fifties. The initial term of the lease was 75
years and the remaining balance of such term is approximately 37 years. The subject property is
improved with a shopping center, which was constructed after it was leased.
Under the provisions of the extension agreement, approximately 30 years will be added to
the initial term and there will be substantial rent increases during the remaining balance of such term.
The extension agreement does not contain an option to purchase the underlying real property.
It is the contention of the Petitioner that the subject extension agreement should not be
subject to the gains tax.
The Petitioner supports it's contention by citing the applicable portion of Section 1440.7 of
the Tax Law which sets forth the three conditions necessary for the creation of a lease to constitute
a transfer of an interest in real property. Such applicable portion of Section 1440.7 to which the
Petitioner refers states, in pertinent part, as follows:
Transfer of an interest in real property shall include the creation of a leasehold or
sublease only where (i) the sum of the term of the lease or sublease and any options
for renewal exceeds forty-nine years, (ii) substantial capital improvements are or may
be made by or for the benefit of the lessee or sublessee, and (iii) the lease or sublease
is for substantially all the premises constituting the real property.
The Petitioner states that the subject lease extension fails at least two of the above conditions.

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

FRANK J. PUCCIA, DIRECTOR

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER

-2­
TSB-A-87 (8) R
Real Property Transfer
Gains Tax
September 14, 1987

First of all, the Petitioner states that it should be noted that the issue with which this Advisory
Opinion deals is an extension of an existing lease rather than the creation or grant of a lease. Thus,
the Petitioner contends that the statutory language simply does not cover such extension. Moreover,
the extension itself is for less than 49 years.
Secondly, the Petitioner contends that the extension agreement does not meet the second
condition as provided at section 1440.7 which refers to substantial capital improvements being made
by or for the benefit of the lessee or sublessee. It is the opinion of the Petitioner that the provision
relating to capital improvements should not be interpreted to embrace customary capital
improvements made by or for a tenant in respect of improved real estate. Rather, such provision
should be limited in its application to situations involving unimproved real estate, which may be
improved by or for the benefit of the lessee or sublessee.
Where an existing lease is substantially modified to extend the term of the lease and to
change the rental payments over the remaining balance of the initial term of such lease, for purposes
of the gains tax, such modifications constitute a new agreement between the parties and therefore
the creation of a leasehold. The term of such leasehold begins as of the effective date of the
modifications.
With respect to the Petitioner's contention that the extension agreement does not meet the
second condition which is necessary for the creation of a lease to constitute a transfer of an interest
in real property (Section 1440.7 (ii) of the Tax Law), there is no present evidence to indicate that the
Legislature intended the language at Section 1440.7 (ii) to be applicable to unimproved real estate
only. Furthermore, the facts presented indicate that capital improvements have been made and may
continue to be made by or for the benefit of the Petitioner.
Accordingly, since it has been established that the extension agreement in the case presented
by the Petitioner constitutes the creation of a lease that is for a sum of a term of more than forty-nine
years and under which substantial capital improvements are or may be made by or for the benefit of
the lessee, and since the lease is for substantially all the premises constituting the real property, such
new lease would be a taxable transfer of an interest in real property for gains tax purposes.

DATED: September 14, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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