We're the ground lessors under a roughly 60-year cooperative housing lease signed in 1970, before New York's Real Property Transfer Gains Tax even existed. The lessee disputes how the rent-escalation formula should work and, to settle the dispute without litigation, we're negotiating changes to the lease's rent calculation and adding a side partnership arrangement for some commercial space. Does modifying this old lease risk losing its 'grandfathered' pre-1983 status and triggering the gains tax on what's effectively a 60-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 It was repealed for any transfer occurring on or after June 15, 1996.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 1990 opinion is preserved here for historical and research value, not as current law.

Beekman C. Cannon and family, fee owners of Manhattan real estate, had leased it to a residential cooperative housing corporation under a lease signed around January 1, 1970 -- more than a decade before the gains tax's March 28, 1983 effective date, and with a total term (including four 10-year renewal options) of roughly 60 years. That length mattered: under the gains tax, a leasehold running more than 49 years, with substantial capital improvements and covering substantially all the premises, counts as a taxable "transfer of real property" -- but because this lease predated the tax entirely, it qualified for the statute's own grandfather clause (former § 1443.6), which exempts transfers made under a written contract entered into before the tax's effective date, as long as the earlier execution date is independently confirmed.

Years later, a genuine dispute arose over the lease's CPI-based rent-escalation formula. The lessor read the formula literally, which would have pushed 1988's additional rent to roughly $1.6 million; the lessee argued that reading was an obvious drafting error that would create an unbearable, bankruptcy-inducing burden never intended by either side in 1970. After more than two years of negotiation, the parties settled by restating several lease provisions to reflect what they agreed was their true original 1970 intent: a $1,200,000 lump-sum payment (with interest) fully resolving the disputed 1988 rent; a corrected CPI base-year going forward (using each year's immediately preceding December CPI, rather than freezing to December 1969, with a temporary cap for 1989); and a new sublease arrangement giving the lessors (as limited partners in a new partnership, with the lessee as general partner) a share of income from four commercial retail spaces and garage space at the property.

The Department's key rule: a lease that's grandfathered because it predates the tax can be amended LATER without losing that exemption, but only if the amendment is "nonsubstantial" -- and any change in the actual amount of consideration for the real property automatically counts as substantial, forfeiting the grandfather protection (former 20 NYCRR § 590.21(a)). Here, the restated terms weren't really changing the deal's economics; they were clarifying an ambiguous, genuinely disputed formula, and the corrected reading actually REDUCED what the lessor's own (arguably erroneous) interpretation would have produced. The Department also separately confirmed the new commercial sublease, on its own, wasn't independently taxable since its term didn't exceed 49 years. Balancing all of this, the Department concluded the modifications were nonsubstantial, so the Cannon lease remained fully grandfathered and gains-tax-free.

What this means for you

Ground lessors and lessees resolving disputes over old, pre-1983 leases

Under this now-repealed tax, settling a genuine ambiguity in a decades-old lease's rent formula -- especially where the settlement clarifies rather than changes the underlying deal, or actually reduces what a literal reading would produce -- wasn't automatically treated as creating a brand-new, taxable 60-year leasehold.

Real estate attorneys negotiating amendments to grandfathered long-term leases

This opinion is a rich, fact-specific example of the "nonsubstantial amendment" line: any change in the ACTUAL CONSIDERATION amount is fatal to grandfathered status, but restating an ambiguous formula to match the parties' documented original intent -- particularly when it doesn't increase what's owed -- can survive.

Accountants tracking pre-1996 grandfathered-lease amendments

If you're reconstructing whether an old ground lease amendment preserved its gains-tax exemption, this opinion's emphasis on the Department's own reminder -- "this opinion applies only to this particular case and the peculiar factual pattern contained therein" -- is a signal that these determinations were always highly fact-specific and case-by-case.

Common questions

Q: Does this grandfathered-lease amendment 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 the $1,200,000 settlement payment itself count as a change in consideration?
A: Because it was framed as satisfying the DISPUTED 1988 additional rent under the CPI formula the parties agreed was ambiguous -- not as new, separate consideration for the property or the lease itself.

Q: Would a rent INCREASE resulting from the settlement have changed the outcome?
A: Very likely yes -- the regulation is explicit that ANY change in the amount of consideration for the real property is automatically substantial and taxable, and the Department specifically noted the restated terms would produce LESS rent than the lessor's own interpretation, which supported the nonsubstantial-amendment conclusion.

Q: Can another ground lessor amending a similar old 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, and the Department itself stressed that "nonsubstantial" determinations are made case by case on the specific factual pattern.

Citations and references

Statutes and regulations:

• former Tax Law § 1440.7 (a leasehold or sublease is a transfer of real property when combined term/renewals exceed 49 years, substantial capital improvements are made, and it covers substantially all the premises)
• former Tax Law § 1443.6 (grandfather exemption for a transfer pursuant to a written contract entered into before the gains tax's effective date, with the execution date confirmed by independent evidence)
• former 20 NYCRR § 590.21(a) (a grandfathered pre-March 28, 1983 contract remains exempt after a later nonsubstantial amendment, determined case by case; any change in the amount of consideration for the real property automatically makes the transfer non-grandfathered and taxable)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a90_5r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90 (5) R
Real Property
Transfer Gains Tax
May 29, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M900221A

On February 21, 1990, a Petition for Advisory Opinion was received from Beekman C.
Cannon, individually and as agent for Anne S. Cannon, Julia Cannon Wertenbaker, Henry B.
Cannon, III and Urling C. Kingery, Lessor, c/o Wien, Malkin and Bettex, 60 East 42nd Street, New
York, New York 10165.
The issue raised by the Petitioner, Beekman C. Cannon, is whether an adjustment in the
computation of rent resulting in a reduction of the amount payable in order to settle a disputed
provision in a lease, executed prior to the March 28, 1983 effective date of the tax on gains derived
from certain real property transfers (the "Gains Tax") result in a transfer of real property subject to
the Gains Tax.
Petitioners are the fee owners of certain real property in New York City (hereafter referred
to collectively as "Petitioner" or "Lessor") subject to a restated agreement of lease (the "Lease"), with
a remaining term of approximately 60 years as of January 1, 1988, consisting of 20 years remaining
under the primary term plus four renewal options of 10 years each (the term of the Lease as
expressed herein includes renewal options). The lessee is a residential cooperative housing
corporation (hereafter referred to as "Lessee"). The Lease contains no purchase option. The Lease
was entered into on or about January 1, 1970, before enactment of the "Gains Tax".
Annual rent for each year through December 31, 1987 consisted of the sum of (i) basic rent
("Annual Net Rental") of $50,000 plus (ii) additional rent determined by multiplying Annual Net
Rental for the year by the percentage increase in the average consumer price index ("CPI") for such
year over the December, 1969 CPI (the "Base Price Index"). Total rent for 1987 was approximately
$140,000 consisting of Annual Net Rental of $50,000 and additional rent calculated under the CPI
formula of approximately $90,000.
The Lease provides (Articles Two and Twenty-six) that Annual Net Rental is to be
redetermined commencing January 1, of each of 1988, 1998, 2008, 2018, 2028 and 2038, as an
amount equal to the greatest of (i) $50,000, (ii) Annual Net Rental paid for the immediately
preceding term, and (iii) 5% of the fair market value of the land determined seven months prior to
the January 1 effective date of each of the applicable years (six months prior to the effective date of
each renewal term).
The revised Annual Net Rental as of January 1, 1988 based on the existing terms of the Lease
is $783,300 (i.e., 5% of $15,666,666, the fair market value of land as of June 1, 1987 as determined
pursuant to an arbitration/appraisal procedure under the Lease). The Lessee is current in payment of
this amount.
TP-9 (9/88)

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TSB-A-90 (5) R
Real Property
Transfer Gains Tax
May 29, 1990

The additional rent for 1988 (Article Three), based on the CPI adjustment formula (which,
as discussed below, Lessee disputes), would be approximately $1,600,000. The Lessee has advised
the Lessor that it disputes the CPI rent formula and has indicated that the CPI rent provision is
erroneous in that the parties must have intended that it be based on the CPI immediately preceding
each January in which Annual Net Rental is to be adjusted and not the December, 1969 CPI. The
Lessor did not initially agree with the Lessee's claim of error.
Petitioner and Lessee have been involved in negotiations to resolve this dispute for more than
two years and have concluded that, to avoid the delay, expense and uncertainties involved in
litigating this matter, it would be in their mutual best interests to compromise this issue.
Accordingly, Petitioner and Lessee have agreed to settle the dispute regarding the CPI rent
computation by restating certain provisions of the Lease to more accurately reflect their original
intentions at the time of the original execution of the Lease as follows:
(i)

(ii
(iii)

(iv)

Annual Net Rental should continue, as presently provided in the Lease, to be based
on 5% of the fair market value of the land effective as of the same dates currently
provided for, i.e., January 1, of each of 1988, 1998, 2008, 2018, 2028, and 2038;
the Lessee would make a payment to the Lessor of $1,200,000 plus interest from July
1, 1989 in full satisfaction of the CPI additional rent payable for 1988;
For each lease year beginning after December 31, 1988, the CPI adjustment would
be determined by treating the CPI for the December immediately preceding each
January in which Annual Net Rental is to be adjusted as the CPI Base Price Index for
each adjustment or renewal period, rather than December, 1969; however, the
maximum CPI additional rent for the calendar year 1989 would be $35,000; and
The Lessee would grant a sublease of four commercial retail stores and garage space
at the premises (the "Commercial Space") to a new limited partnership in which the
Lessee would be the general partner and Petitioner the limited partners. The limited
partners would receive for each year beginning January 1, 1989 the greater of (i) an
amount equal to 30% of gross annual rental income derived from the Commercial
Space during each year [gross rental income is to be reduced by the cost of leasing
(such as brokerage and advertising costs)] and (ii) an amount equal to 22.5% of such
rental income for the year in question, as projected by the Lessee's real estate
advisors and set forth on a schedule attached to Partnership agreement. Such
payments would be payable only from the rental income actually received from the
Commercial Space and if said rental income is less than 22.5% of the gross rental
income as projected, the payment of the amount of such shortfall would be deferred
and be payable from future Commercial space rents with interest at the applicable
Internal Revenue Service rate. Beginning January 1, 2004, and annually thereafter,
the amount payable to the Petitioner, as limited partner, shall be the greatest of (x)

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TSB-A-90 (5) R
Real Property
Transfer Gains Tax
May 29, 1990

amount equal to 25% of the said rental income with respect to the prior year; and (z)
an amount equal to 30% of such rental income for the year in question. Interest shall
accrue on the amount payable to the limited partner with respect to Periods beginning
January 1, 1989 at the Internal Revenue Service rate from July 1, 1989 until paid. If
the minimum amount payable to the limited partner pursuant to the formula
described above is not actually paid for any three consecutive years, the limited
partner at its option may terminate the partnership and, upon such termination, the
percentage amount of 5% in Articles Two and Twenty-six of the Lease shall be
increased to 8.5%, effective retroactively as of January 1 of the first of said. three
calendar years.
The term of the Lease would not be extended, no purchase option would be granted to the
Lessee, and all other provisions of the Lease would remain unchanged, except for certain ministerial
provisions, the inclusion of a provision which would transfer the obligation to make the payments
payable to the Petitioner under the partnership agreement to the Lease in the event the partnership
is terminated, and the Lessee would be given a one-time right of first refusal on any sale or transfer
by any of the present owners (or a successor) of their interest in the property to a bonafide third party
purchaser. The amount payable to the Lessor under the Lease and pursuant to the partnership
agreement, i.e., items (ii), (iii) and (iv) above or if Annual Net Rental is determined at the rate of
8.5% of the fair market value of the land if the partnership is terminated, is currently (and for the
future is projected to be at all times) significantly less than the amount which would otherwise be
payable to the Lessor under the Lease but for the settlement described herein. The Modification of
Lease Agreement would specifically provide that the total amount payable to the Petitioner pursuant
to the restated lease and the partnership agreement during any calendar year will not exceed the
amount that would have been paid to the Petitioner under the original lease during such calendar
year.
Section 1443(6) of Article 31-B of the Tax Law states in pertinent part:
"A total or partial exemption shall be allowed in the following cases:
(6) Where a transfer of real property occurring after the effective date
of this article is pursuant to a written contract entered into on or
before the effective date of this article, provided that the date of
execution of such contract is confirmed by independent evidence,
such as recording of the contact, payment of a deposit or other facts
and circumstances as determined by the Tax Commission. ... "

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TSB-A-90 (5) R
Real Property
Transfer Gains Tax
May 29, 1990

Section 590.21(a) of the Gains Tax Regulations states:
"(A) Question: If a contract entered into on or before March 28, 1983
is amended after such date, will the contract continue to be exempt
by reason of section 1443(6) of the Tax Law?
Answer: Yes. As long as the amendment is of a non substantial
nature. The determination of what constitutes a nonsubstantial change
will be made on a case-by-case basis. However, any change in the
amount of consideration for the real property automatically results in
a transfer which is not pursuant to a written contract entered into on
or before March 28, 1983, and thus such transfer is taxable."
The Petitioner and lessee dispute the Consumer Price Index (CPI) adjustment formula used
to compute the additional rent for years starting in 1988. (There are approximately 60 years
including renewals remaining on the lease as of January 1, 1988. A substantial change to the
grandfathered lease in such year would lead to the creation of a lease for more than 49 years and
thereby subject the lease to the gains tax). The lessor initially believed that the intent of the lease was
to compute additional rent based upon increases in the CPI over the 1969 base rent. The lessee
initially believed that the intent of the lease was to compute additional rent based upon the CPI
immediately preceding each 3anuary in which the base rent is adjusted and should not remain at the
1969 level. The parties to the lease have decided that the lessor's interpretation of the CPI formula
would create an unbearable economic burden on the lessee leading to bankruptcy, a situation which
was not intended at the time of the execution of the lease. Therefore, the parties have decided to
clarify the lease in order to reach an agreement which would allow the lessee to continue and operate
in a reasonable manner.
The modifications that would be made to the lease would decrease the rental payments which
would be required under the lessor's interpretation of the lease. This confirms the lessee's contention
that cumulative increases in the CPI are automatically reflected under an annual net rental
adjustment which is made at certain intervals in the lease and therefore the use of the December 1969
CPI as the base rent was not the intent of the parties.
The modifications to be made to the lease would be made with the intent to clarify a
problematic provision in such lease and thereby apply settled rules to unusual conditions so as to do
equity between the parties without the necessity of extended litigation. Therefore, the modifications
to the lease would be made for the purpose of clarifying the computation of the rental payments so
as to reflect the original intent of the parties rather then changing the amount of the consideration
for the lease. This would be required because the original terms of the lease, if construed as claimed
by the lessor, would lead to an outrageous, oppressive, unconscionable and unintended result
ultimately, in all probability, causing the tenants to lose their homes.

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TSB-A-90 (5) R
Real Property
Transfer Gains Tax
May 29, 1990

It is noted that the payment of the $1,200,000 would be in satisfaction of the CPI additional
rent payable for 1988.
It is further noted that the sublease from the lessee to a limited partnership, in which the
lessee would be the general partner and the Petitioner would be the limited partner, would not be a
transaction subject to the gains tax in accordance with Section 1440.7 of the Tax Law since the term
of the sublease would not exceed 49 years.
Such amendments would therefore be of a nonsubstantial nature as intended by Section
590.21(a) of the Regulations. Accordingly, the lease would remain grandfathered under Section
1443(6) of the Tax Law as there would be no substantial change in such lease. It is noted that the
regulation provides that the determination of what constitutes a nonsubstantial change will be made
on a case-by-case basis and thus this opinion applies only to this particular case and the peculiar
factual pattern contained therein.

DATED: May 29, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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