We leased out our property in 1968 for 21 years with a 21-year renewal option. That option lapsed, and we've since extended the lease twice more -- a 5-year extension in 1989, then a 23-year extension in 1994. The lease includes a right of first refusal (not a purchase option) and lets the tenant make substantial capital improvements, covering essentially the whole property. The new tenant (who took an assignment of the lease) now wants to extend the current term from 23 years to 30 years. Does stacking these lease extensions eventually push the lease term over New York's 49-year threshold and trigger the Real Property Transfer Gains Tax?

Plain-English summary

Strausman-Mayfair Associates, L.P. leased out New York real property starting April 9, 1968, for an initial term of 21 years (ending December 31, 1989) with an option to renew for an additional 21 years. That renewal option expired unused. Instead, the parties agreed to a shorter 5-year extension beginning December 31, 1989. Then, in March 1994, landlord and tenant extended the lease again for 23 years, running from December 31, 1994 through December 31, 2017. By the time of this ruling, the lease had been assigned to a new tenant, who wanted to extend the current 23-year term by another 7 years, to 30 years total. The lease allowed substantial capital improvements by the tenant and covered substantially all of the property -- two of the three conditions that can make a long-term lease a taxable "transfer of real property" under the gains tax. The remaining question was whether the lease term (aggregating all these extensions) would cross the tax's 49-year threshold.

Each modification restarts the clock. The Department applied its earlier ruling in Syosset Shopping Center Associates, TSB-A-87(8)R, which held that when parties modify an existing lease to extend its term, that modification is treated as the creation of an entirely new lease agreement between them -- with its term starting fresh from the date of that modification, not the original lease's execution date. Applying that rule here, the original 1968 lease (pre-dating the gains tax) and its original 21-year term became irrelevant once the lease was first modified. The relevant "new lease" began with the January 1989 modification (the 5-year extension), and its term for 49-year-threshold purposes is measured forward from that date: 5 years (1989 extension) plus the proposed 30 years (the further-extended current term) = 35 years total -- well short of 49 years.

Right of first refusal doesn't change the analysis. Even a lease under 49 years can become taxable if it's coupled with an option to purchase the property. But the lease here contained only a right of first refusal, not a purchase option -- and the Department's regulations distinguish the two: a right of first refusal only lets the holder match a price a willing seller has already accepted from someone else, while a true option lets the holder compel an unwilling owner to sell at a pre-agreed price. Because a right of first refusal isn't an "option" for this purpose, it didn't independently trigger gains-tax treatment regardless of the lease's length.

Result. Since the newly-measured aggregate term (35 years) stayed under 49 years, and the right of first refusal wasn't a disqualifying purchase option, the proposed extension was not subject to the Real Property Transfer Gains Tax.

What this means for you

Commercial landlords and tenants stacking multiple lease extensions over time

If your lease has been modified/extended more than once, the relevant term for a 49-year-style long-term-lease tax threshold isn't necessarily the sum of every extension back to the original lease date -- it's measured forward from the date of the FIRST modification, once any modification has occurred. Track your lease's modification history carefully; an old, seemingly long-ago-expired original term can become irrelevant once modifications start.

Real estate attorneys structuring lease renewals to stay under long-term-lease tax thresholds

A right of first refusal is treated differently from a purchase option under these rules -- only a true option (letting the holder compel an unwilling owner to sell) makes an under-49-year lease taxable. If you're trying to avoid triggering long-term-lease tax treatment, confirm any purchase-related lease provision is drafted as a right of first refusal, not an option.

Accountants and tax professionals reviewing older ground leases

The Real Property Transfer Gains Tax discussed in this ruling was repealed for transfers on or after June 15, 1996 and no longer applies to new transactions -- but the underlying "each modification creates a new lease" principle traces back to Syosset Shopping Center Associates, TSB-A-87(8)R, and the analogous 49-year/substantial-improvements/90%-of-premises test still appears in the Real Estate Transfer Tax's own long-term-lease rule, so the modification-restarts-the-clock logic may still be persuasive there.

Common questions

Q: If my lease has been extended multiple times, does the tax authority add up every extension back to the original lease date to see if it crosses 49 years?
A: No, according to this ruling -- once a lease has been modified, the modification is treated as creating a new lease, and the term is measured forward from that first modification date, not the original lease's execution date.

Q: Does a right of first refusal in my lease count as a purchase option that could make even a short lease taxable?
A: No. A right of first refusal (matching a price already offered to a willing seller by someone else) is distinct from a purchase option (compelling an unwilling owner to sell at a pre-set price) -- only the latter triggers long-term-lease tax treatment regardless of lease term.

Q: Is the Real Property Transfer Gains Tax discussed in this ruling still a concern for new lease extensions today?
A: No -- it was repealed for transfers occurring on or after June 15, 1996. However, a similarly structured long-term-lease rule (49 years, substantial improvements, 90% of the premises) exists under the still-active Real Estate Transfer Tax, so the modification-restarts-the-clock reasoning may still be relevant there.

Q: Can I rely on this exact 35-year calculation for my own lease?
A: No. This is an advisory opinion binding the Department only as to Strausman-Mayfair Associates and its specific lease history; your own lease's modification timeline needs its own analysis.

Citations and references

Statutes, regulations, and prior opinions:

• Section 1440.7 of the Tax Law (gains tax definition of "transfer of real property" -- 49-year/substantial improvements/90%-of-premises test for a taxable lease)
• Sections 1441, 1443.1 of the Tax Law; 20 NYCRR 590.1 (gains tax on transfers of $1 million+; repealed for transfers on/after June 15, 1996)
• 20 NYCRR 590.5(a)-(b) (long-term lease/purchase-option as a taxable gains-tax transfer)
• 20 NYCRR 590.30 (a right of first refusal is not an "option" for gains-tax purposes)
• Syosset Shopping Center Associates, Adv Op St Tx Comm, September 14, 1987, TSB-A-87(8)R (lease modification creates a new lease effective as of the modification date)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a94_8r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (8) R
Real Property
Transfer Gains Tax
June 14, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M940513A

On May 13, 1994, a Petition for Advisory Opinion was received from Strausman-Mayfair
Associates, L.P., 98 Cuttermill Road, Great Neck, New York 11021.
The issue raised by Petitioner, Strausman-MayfairAssociates, L.P., is whether the extension
of an existing lease for an aggregate term of beyond forty-nine years is subject to the Real Property
Transfer Gains Tax (hereinafter the "gains tax").
Petitioner, as lessor, entered into a lease agreement on April 9, 1968 for certain real property
in New York, for a term of 21 years, ending December 31, 1989, with an option to renew the lease
for an additional 21 years. On January 17, 1989, after the original 21 year term, and the option to
renew expired, an extension of the lease for a term of 5 years was agreed upon. The extension, which
began on December 31, 1989, expires on December 31, 1994. On March 24, 1994, Petitioner and
the tenant extended the lease agreement for an additional period of 23 years starting December 31,
1994 and ending on December 31, 2017.
Presently, the tenant has assigned the lease with Petitioner's consent and the new tenant wants
to extend the lease term from 23 years to 30 years (i.e., an additional seven years).
Under the terms of the lease substantial capital improvements are or may be made by or for
the benefit of the lessee and the lease is for substantially all of the premises constituting the real
property. In addition, the lease contains a right of first refusal.
Pursuant to Sections 1441 and 1443.1 of the Tax Law and Section 590.1 of the Gains Tax
Regulations the gains tax is a ten percent tax on the gain derived from the transfer of real property,
which includes the acquisition or transfer of a controlling interest in any entity with an interest in real
property, where the property is located in New York State and where the consideration for the
transfer is one million dollars or more.
Section 1440.7 of the Tax Law provides, in pertinent part, as follows:

7. "Transfer of real property" means the transfer or transfers of any interest
   in real property by any method ... 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 of the premises
   constituting the real property...

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Section 590.5 of the Gains Tax Regulations provides, in part, as follows:
(a) Question: Is the creation of a leasehold or sublease a transfer of real property?
Answer: Yes. The creation of a leasehold or sublease is a transfer of an interest in
real property, but only where:
(1) the sum of the term of the lease or sublease and any options for renewal
exceeds 49 years;
(2) substantial capital improvements are or may be made by or for the benefit
of the lessee or sublessee; and
(3) the lease or sublease is for substantially all of the premises constituting
the real property. Substantially all is defined to mean 90 percent of the total rentable
space of the premises, exclusive of common areas. (See section 590.56 of this Part,
relating to an assignment of a lease.) For the purpose of determining whether a lease
or sublease is for substantially all of the premises constituting the real property,
premises shall include, but not be limited to the following:
(i) an individual building, except for space which constitutes
an individual condominium or cooperative unit;
(ii) an individual condominium or cooperative unit; or
(iii) where a lease or sublease is of vacant land only, any
portion of such vacant land.
(b) Question: Is the creation of a leasehold for a term of less than 49 years ever
taxable?
Answer: Yes. If a leasehold is coupled with the granting of an option to purchase
the property, the transfer is taxable regardless of the term of the lease.
Section 590.30 of the Gains Tax Regulations provides as follows:
Question: Is the term right of first refusal, contained in a lease agreement, considered
an option?
Answer: No. A right of first refusal grants the recipient the right to buy the real
property at the same price that has been offered to the seller and the seller accepts or
proposes to accept from a third-party buyer. The right of first refusal does not grant
the lessee the ability to compel an unwilling owner of the real property to sell. In
contrast, an option gives the optionee the right to purchase property at an agreed­
upon price from the option or, if he chooses, at any time within the option period.

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Real Property
Transfer Gains Tax
June 14, 1994
The

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Transfer Gains Tax
June 14, 1994
optionee may compel an unwilling option or to convey the real property upon the
exercise of the option. Consequently, a lease for less than 49 years containing a right
of first refusal is not a transfer of real property and is not taxable under the gains tax.
Accordingly, a purchase of real property pursuant to the exercise of a right of first
refusal is not exempt under the grandfather exemption.
In Syosset Shopping Center Associates, Adv Op St Tx Comm, September 14, 1987, TSB-A­
87(8)R the Tax Commission opined that a long-term lease originally executed in the early nineteen
fifties for an initial term of 75 years, and later extended for an additional 30 years after March 28,
1983 (the effective date of the gains tax) with the remaining term on the original lease being 37
years, was considered to be the creation of a new lease effective as of the date of the modification.
Therefore, the 30 year term was aggregated with the 37 years remaining on the original lease to
determine whether the term of the new lease exceeded forty-nine years, and, thus, would be subject
to the gains tax.
In the instant case, Petitioner entered into a lease on April 9, 1968, prior to the enactment of
the gains tax, for a term of 21 years. Subsequently, on January 17, 1989, the lease was extended for
an additional 5 years and on March 24, 1994, for an additional 23 years. Presently, the tenant wants
to extend the term of the lease for an additional 7 years. Pursuant to Syosset Shopping Center
Associates, supra, where a lease entered into prior to the effective date of the statute is modified to
extend the term of the lease, such modification constitutes the creation of a new agreement between
the parties and is, therefore, the creation of a new leasehold. Accordingly, the term of such leasehold
would begin as of the date of the first modification. Thus, the term of the new agreement, in the
instant case, would be deemed to be 35 years (i.e., 5 year renewal on January 17, 1989 plus present
30 year renewal).
Pursuant to Section 1440.7 of the Tax Law and Section 590.5 of the Gains Tax Regulation
the creation of a lease is a transfer of real property subject to the gains tax where the term of lease
and any options for renewal exceed forty-nine years and certain other conditions as set forth therein
are present, unless the lease contains an option to purchase real property. In cases where a leasehold
is coupled with the granting of an option to purchase the property, the transfer is taxable regardless
of the term of the lease and the other specific condition as set forth in Section 1440.7 of the Tax Law
being met. Pursuant to Section 590.30 of the Gains Tax Regulations, a right to first refusal contained
within a lease does not constitute an option. Therefore, since the term of the new agreement will be

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June 14, 1994
for less than 49 years and the lease does not contain an option to purchase, pursuant to Section
1440.7 of the Tax Law and Section 590.5 of the Gains Tax Regulations such lease is not subject to
the gains tax.

DATED: June 14, 1994

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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