We (an unaffiliated seller) are transferring a commercial property to a newly formed LLC owned by a REIT and its operating partnership, in exchange for a 40% ownership stake in that LLC plus cash and mortgage-related consideration. We signed the sale agreement on December 1, 1995, but the REIT's shares were first issued in its IPO on June 2, 1995, and our closing may slip past the six-month anniversary of that IPO. Does our sale qualify for the reduced 'REIT transfer' tax rates under New York's Real Estate Transfer Tax and Real Property Transfer Gains Tax if the closing happens within a reasonable time after we signed but after the strict six-month window? And if we (the selling partnership) later distribute the sale proceeds to our individual partners, does each partner need to separately satisfy the requirement of retaining at least 40% of their share's value in the new LLC for two years?

Plain-English summary

Tarrytown Corporate Center III, L.P. ("the Transferor") owned an office property at 520 White Plains Road in Tarrytown, New York, and agreed on December 1, 1995 to sell its fee interest to a newly formed special-purpose LLC ("the Transferee"). The Transferee was to be formed by Reckson Associates Realty Corp. -- a publicly traded real estate investment trust ("the REIT") -- and Reckson Operating Partnership, L.P. -- a partnership more than 70% owned by the REIT ("the OP") -- under an "UPREIT" structure where the REIT holds its real estate indirectly through the OP and other partnerships. The Transferor and the REIT/OP were unrelated, unaffiliated parties. In exchange for the property, the Transferor would receive a 40% ownership interest in the Transferee, $4,560,000 in cash, and 60% of any paydown achieved on an assumed $15.4 million mortgage -- while the REIT would end up owning 50% of the Transferee and the OP 10%.

Why the timing mattered. New York's Tax Law was amended in 1994 (Chapter 170) to give a reduced tax rate to transfers made "in connection with the initial formation" of a REIT: 2.5% of the gain under the gains tax (instead of the normal 10%) and $1 per $500 of consideration under the transfer tax (instead of the normal $2 per $500). The Department's implementing guidance, TSB-M-94(4)-R, specified that a transfer qualifies if it occurs within six months of the REIT's initial share offering. The REIT's shares were actually issued and began trading on the New York Stock Exchange on June 2, 1995 (even though "when issued" trading had started a week earlier, on May 25, 1995, contingent on the actual June 2 issuance) -- meaning the six-month window closed on December 2, 1995, just one day after the Transferor signed its sale contract.

Coupling the contract to the later closing. The Department noted that executing a contract to sell real property is, by itself, a "transfer of real property" for gains-tax purposes (since an option or contract to purchase counts as a taxable "interest," and a contract to sell without occupancy is specifically addressed by a separate exemption). Since the December 1, 1995 contract signing fell within the six-month window (barely), the Department held it was reasonable to "couple" that initial contract-transfer with the actual later transfer of fee title at closing -- meaning the closing itself would also qualify for the reduced REIT-transfer rate, as long as the closing happened within a reasonable time after the contract. The Department set a presumptive outer boundary: closing by the later of 90 days after the contract (February 29, 1996) or 10 business days after receiving the ruling. Critically, the Department added that even missing that window despite the parties' best efforts wouldn't automatically disqualify the deal -- "reasonable time" would be evaluated case-by-case if the actual closing slipped further.

The 40%/two-year retention test, tested partner-by-partner. To qualify as a "real estate investment trust transfer," Section 1441.2(b)(ii) requires (among other things) that the seller receive ownership interests in the transferee worth at least 40% of its equity interest in the property, and that those interests be retained by the seller or its owners for at least two years. Because the Transferor was itself a partnership that might liquidate and distribute its 40% LLC interest to its own individual partners within that two-year window, the Department confirmed the 40%-value and retention requirements would then be tested separately for each partner based on that partner's pro-rata share -- and that one partner falling short of the requirement wouldn't taint any other partner's qualification for the reduced rate.

Valuing the consideration. Finally, the Department accepted the parties' proposed method of calculating "consideration" for rate-computation purposes: simply using the negotiated deal value in the sale agreement (cash plus the value of the LLC interest received plus assumed debt), rather than the statute's default formula (based on net cash flow divided by a federal long-term-rate-plus-2% factor), because the statute allows the Department to approve any reasonable alternative valuation method and the negotiated price here reasonably reflected fair market value.

What this means for you

Property owners selling into a newly formed REIT or UPREIT structure

If your sale contract is signed within six months of the REIT's initial share offering but your closing will slip past that six-month mark, you may still qualify for New York's reduced REIT-transfer transfer tax and gains tax rates -- the Department treats the contract signing itself as the operative "transfer" that starts the clock, and a later closing "coupled" to that contract can ride along, as long as it happens within a reasonable time (guided by, but not strictly bound to, a 90-day-or-10-business-days-post-ruling benchmark).

Selling partnerships planning to liquidate and distribute REIT/LLC interests to partners

If you expect to distribute your ownership stake in the buyer entity to your own partners before the two-year retention period ends, plan for the 40%-value and retention requirements to be tested on a partner-by-partner basis -- structure distributions so each partner who needs the reduced rate actually retains their qualifying share, since other partners falling short won't drag down your own qualification.

Accountants and tax professionals verifying whether this framework is still current law

The reduced-rate REIT-transfer provisions for the Real Estate Transfer Tax discussed here trace to 1994 legislative amendments; the parallel Real Property Transfer Gains Tax provisions no longer apply at all, since that tax was repealed for transfers after June 15, 1996. Confirm the current transfer-tax REIT rate and requirements haven't since changed before relying on this 1996 analysis for a live transaction.

Common questions

Q: My REIT-formation sale contract was signed within six months of the REIT's IPO, but the actual closing will happen later -- do I lose reduced-rate eligibility?
A: Not necessarily. The Department treats signing a sale contract as itself a "transfer," so if the contract falls within the six-month window, the later closing can be "coupled" to it and still qualify for the reduced REIT-transfer rate, as long as it closes within a reasonable time afterward.

Q: Is there a hard deadline for how long after the contract the closing can occur?
A: The Department suggested the later of 90 days after the contract or 10 business days after receiving a ruling as a presumptive benchmark, but explicitly said missing that window despite good-faith efforts wouldn't automatically disqualify the deal -- it would be evaluated case-by-case.

Q: If my selling partnership distributes its REIT/LLC ownership interest to individual partners before the two-year retention period ends, does that ruin reduced-rate eligibility for everyone?
A: No. The 40%-value and two-year retention requirements are tested partner-by-partner. One partner failing to retain their required share doesn't affect any other partner's eligibility for the reduced rate.

Q: Is the Real Property Transfer Gains Tax discussed in this ruling still relevant today?
A: No -- it was repealed for transfers occurring on or after June 15, 1996. Only the Real Estate Transfer Tax's REIT-transfer provisions could still be relevant, and even those should be reverified against current law.

Citations and references

Statutes and guidance:

• Section 1402(b) of the Tax Law (reduced RETT rate for REIT transfers -- $1 per $500 vs. normal $2 per $500)
• Section 1441.2 of the Tax Law (reduced gains tax rate for REIT transfers -- 2.5% vs. normal 10%; added by Chapter 170 of the Laws of 1994)
• Section 1441.2(b)(ii) of the Tax Law (definition of "real estate investment trust transfer" -- 40%-value and two-year retention requirements)
• Section 1443.7 of the Tax Law (gains tax exemption for a contract to sell real property without use or occupancy)
• Section 1440.4 of the Tax Law (gains tax definition of "interest," including an option or contract to purchase)
• Section 1440.7(a) of the Tax Law (gains tax definition of "transfer of real property")
• TSB-M-94(4)-R (Department memorandum, issued December 2, 1994, providing guidance on the REIT transfer provisions)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a96_2r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (2) R
Real Property Transfer
Gains Tax
Real Estate Transfer Tax
March 21, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M960122D

On January 22, 1996, a Petition for Advisory Opinion was received from Tarrytown
Corporate Center III, L.P., 580 White Plains Road, Tarrytown, New York 10591.
The Petitioner, Tarrytown Corporate Center III, L.P., (the "Transferor") proposes to transfer
its fee simple interest in real property located at 520 White Plains Road, Tarrytown, New York (the
"Property"). The Petitioner, a partnership, would transfer this Property to a special purpose limited
liability company (the "Transferee") to be formed by Reckson Associates Realty Corp., a corporation
that qualifies and has elected to be treated as a real estate investment trust for Federal and New York
State tax purposes (the "REIT"), and by Reckson Operating Partnership, L.P., a New York limited
partnership that is greater than 70% owned by the REIT (the "OP"). The Property will be the sole
asset of the Transferee following the transaction. This transfer would occur pursuant to an agreement
dated December 1, 1995 by and among the Transferor, the REIT, and the OP (the "Agreement"). The
REIT and the OP on the one hand, and the Transferor and its partners on the other hand, are
independent and unaffiliated with respect to each other. In connection with this transfer the Petitioner
raises the following issues:
(1) Provided that the closing and the sale of the Property occur within a reasonable period
of time following the execution of the Agreement (which occurred on December 1, 1995), whether
the sale of the Property to the Transferee will constitute a real estate investment trust transfer (a
"REIT transfer") made within six months of the date of the initial offering of the REIT shares (June
2, 1995) for purposes of the real estate transfer tax imposed by Article 31 of the Tax Law (the
"transfer tax") and the real property transfer gains tax (the "gains tax") imposed by Article 31-B of
the Tax Law.
(2) Also, in connection with issue #1, if the sale of the Property will be deemed to have
occurred within a reasonable period of time following the execution of the Agreement if the closing
occurs not later than the later of (a) 90 days after the date the Agreement is executed (i.e., by
February 29, 1996) or (b) 10 business days following the receipt of this advisory opinion. In this
regard, if, despite their best efforts to close the sale of the Property by February 29, 1996 or within
10 business days following the receipt of this advisory opinion, the parties are unable to do so, and
the closing and sale of the Property takes place at some point thereafter, whether this inability to
close within the time frames described above will cause the transfer of the Property to be considered
as not having occurred within a reasonable period of time following the execution of the Agreement.
(3) If the Transferor liquidates or otherwise distributes to its partners the Consideration
received for the Property within two years following the date of the transfer of the Property to the
Transferee, will the consideration and ownership requirements of sections 1402(b) and 1441.2 of the
Tax Law be satisfied on a partner-by-partner basis by any partner of the Transferor who continues

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Real Property Transfer
Gains Tax
Real Estate Transfer Tax
March 21, 1996
to retain, for the remainder of the two-year period from the date of transfer of the Property to the
Transferee, ownership interests in the Transferee having a value of at least 40% of that partner's pro­
rata portion of the equity value of the Property transferred to the Transferee (determined as of the
date of the transfer of the Property to the Transferee). Also, whether the failure of any one partner
to meet the consideration and ownership requirements will affect the gains tax or transfer tax liability
of any other partner.
(4) Whether the consideration for the transfer of the Property to the Transferee will be equal
to the amount of Consideration negotiated for and contained in the Agreement if this amount is equal
to the cash received plus the value of interests in the Transferee to be paid for the Property, plus the
amount of any indebtedness that the Transferee assumes or takes the Property subject to.
The REIT was formed using a structure commonly known as an UPREIT, in which the real
property assets of the REIT are owned indirectly by the REIT through the OP and other partnerships.
Shares of the REIT are publicly traded on the New York Stock Exchange. The REIT and the OP
were formed in September of 1994. At that time, and until June 2, 1995, the REIT had no assets or
operations and did not qualify or elect to be treated as a REIT. On June 2, 1995, a series of
transactions occurred, including an initial public offering of REIT shares, in which REIT shares and
interests in the OP were issued in exchange for cash, real property interests, and controlling interests
in entities that own New York real property. Upon this initial issuance and public offering, REIT
shares began trading on the New York Stock exchange on June 2, 1995. The REIT shares were
offered to the public in a prospectus dated May 25, 1995. As is customary with public offerings of
securities, in order to permit the maximum degree of liquidity for the newly issued shares, the New
York Stock Exchange began to list the prices for orders for the shares beginning on May 25, 1995,
and investors' orders for the shares were permitted to begin to be traded on a "when issued" basis.
Under the rules of the stock exchange, all such orders (and any trades based on the orders) were
contingent upon and subject to the actual sale and issuance of the REIT shares by the REIT, which
occurred on June 2, 1995. From and after this date, the price listing of REIT shares on the stock
exchange reflected the actual price for the shares themselves.
Under the terms of the Agreement, the Transferee would acquire the Property subject to the
mortgage of Connecticut General Life Insurance securing an amount not in excess of $15,400,000
(the "Cigna Loan"), and any lien or encumbrance of the Town of Greenburgh securing payments in
lieu of taxes. The Transferor would transfer the Property to the Transferee in exchange for (I) a 40%
interest in the Transferee, (ii) $4,560,000 in cash, and (iii) 60% of the amount by which $15,400,000
exceeds the outstanding balance of the Cigna Loan (other than current interest, which would be
adjusted at closing) prior to taking into account the reduction in the Cigna Loan contemplated by
Paragraph 5.3.d of the Agreement (collectively, the Consideration"). The Transferor may distribute
to its partners their proportionate shares of the Consideration. Following these transactions, the REIT
would retain a 50% ownership interest in the Transferee, and the OP would retain a 10% ownership
interest in the Transferee.

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Real Estate Transfer Tax
March 21, 1996
Analysis
In 1994, the Tax Law was amended by Chapter 170 to provide special tax treatment under
the gains tax and the transfer tax for certain transfers or conveyances made in connection with the
initial formation of a REIT. The special provisions include a reduced rate of tax under the gains tax
of 2.5% of the gain (as opposed to the otherwise applicable rate of 10%) and under the transfer tax
of $1 for each $500 of consideration or fractional part thereof (as opposed to the otherwise applicable
rate of $2 for each $500 of consideration or fractional part thereof). The amendments made by
Chapter 170 to Tax Law section 1402 with regard to the transfer tax are identical in substance to the
amendments made to Tax Law section 1441 with regard to the gains tax. We will reference section
1441 in this opinion. No regulations have been promulgated which interpret the provisions of section
1441.2. However, the New York State Department of Taxation and Finance (the "Department")
issued memorandum TSB-M-94(4)-R on December 2, 1994 to provide guidance to taxpayers with
respect to the new REIT provisions. We will make references in this opinion to the memorandum
as "the TSB-M".
In order to be eligible for the reduced tax rate, a transfer must qualify as a real estate
investment trust transfer. This term is defined in section 1441.2(b)(ii) as "any transfer of real
property to a REIT, or to a partnership or corporation in which a REIT owns a controlling interest
immediately following the transfer, which transfer occurs in connection with the initial formation
of the REIT, provided that the conditions set forth in clauses (A) and (B) [§1441.2(b)(ii)(A) and (B)]
of this subparagraph are satisfied."
Issues #1 and #2
The Department, through its issuance of the TSB-M, has provided that REIT transfers made
within six months after the date of the initial offering of REIT shares qualify as transfers made in
connection with the initial formation of a REIT.
The date of the initial offering of REIT shares is the date when the shares are actually issued.
In this case, the REIT shares were issued on June 2, 1995. Although the New York Stock Exchange
began to list prices for orders for shares, and investors' orders for the shares were permitted to begin
to be traded on a "when issued" basis, on May 25, 1995, all of the orders (and any trades based on
the orders) were contingent upon and subject to the actual sale and issuance of the REIT shares by
the REIT, which did not occur until June 2, 1995. Accordingly, based on the policy set forth in the
TSB-M, the transfer of the Property must have occurred on or before December 2, 1995 in order for
it to qualify as a transfer in connection with the initial formation of the REIT.
The phrase "transfer of real property" is defined in section 1440.7(a) of the Tax Law as the
transfer of any interest in real property by any method. The term "interest", as defined in section
1440.4 of the Tax Law, includes a contract to purchase real property. Tax Law section 1443.7
provides an exemption from the gains tax transfers of real property consisting of the execution of
a contract to sell real property without the use or occupancy of the property. When these provisions
are read together, it is clear that the execution of a contract to sell real property is in itself a "transfer
of real property" under the gains tax.

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March 21, 1996
Accordingly, although in this case the only "transfer of real property" that took place within
six months of the initial offering is the execution of the Agreement, a "transfer" which is not taxable,
it is reasonable to couple that "transfer" with the actual transfer of the fee simple interest which
occurs within a reasonable time thereafter. Once the two transfers are coupled, then the actual
transfer of title will be eligible for the lower tax rate afforded to REIT transfers, provided the other
requirements of section 1441.2 are satisfied.
Thus, the transfer of the fee title of the Property shall be deemed to have occurred within a
reasonable period of time following the execution of the Agreement if such transfer occurs not later
than the later of (a) 90 days after the date the Agreement is executed, that is, by February 29, 1996
or (b) 10 business days following the receipt of this advisory opinion. Further, even if the transfer
of the fee title takes place beyond these time frames, the transfer may still be considered to have
occurred within a reasonable time after the execution of the Agreement. The exact length of time
beyond these periods cannot be specifically stated here. That will be determined on a case-by-case
basis. Notwithstanding the foregoing, if despite their best efforts to transfer the fee of the Property
by February 29, 1996 or within 10 business days of the receipt of this advisory opinion the parties
are unable to do so, and then the transfer takes place at some point thereafter, this inability to transfer
the Property within this period shall not necessarily cause the transfer of the Property to be
considered as not having occurred within a reasonable period of time following the execution of the
Agreement.
Issue #3
Section 1441.2(b)(ii) sets forth three requirements that must be met in order for a transfer to
constitute a REIT transfer. First, the value of the ownership interests in the Transferee received by
the Transferor as consideration for the transfer of the Property must be equal to an amount not less
than 40% of the value of the Transferor's equity interest in its Property. Second, the ownership
interests in the Transferee that are received by the Transferor must be retained by the Transferor or
by the owners of the Transferor (i.e., its partners) for a period cf not less than two years following
the date of transfer. Third, section i44i.2(b)(ii) sets forth a requirement concerning the use of the cash
proceeds from the sale of ownership interests in the REIT upon its initial formation. For purposes
of this advisory opinion, it is assumed that the third requirement of section 1441.2(b)(ii) was
satisfied.
The first two requirements of section 144!o2(b)(ii) will be applied on a partner-by-partner
basis if the Transferor liquidates, or otherwise distributes to its partners the Consideration received
for the transfer of the Property, within two years following the date of the transfer of the Property.
In this event, the consideration and ownership retention requirements will continue to be satisfied
for each partner who continues to retain, for the remainder of the two year period from the date of
the transfer of the Property to the Transferee, the required ownership interests in the Transferee.
These ownership interests must have a value of at least 40% of the partner's pro-rata portion of the
equity value of the Property transferred to the Transferee (determined as of the date of the transfer
of the Property to the Transferee).

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Issue #4
Paragraph (c) of section 1441.2 of the Tax Law sets forth a general rule regarding the
calculation of consideration. The law provides that the consideration is to be determined by reference
to the fair market value of the real property being transferred. Generally, under the statute, the fair
market value is calculated by dividing (i) the net cash flow from operations with respect to such real
property for the 12-month period ending on the last day of the second month preceding the date of
the transfer, by (ii) the sum of (A) the federal long-term rate compounded semi-annually that is
determined by the United States Secretary of the Treasury determined under Internal Revenue Code
section 1274(d) in effect 30 days prior to the transfer and (B) two percentage points. However,
paragraph (c) authorizes the taxpayer to utilize any other method for determining fair market value
which the Commissioner has prescribed in rules or otherwise. In essence, this provision gives the
Department the authority to review a taxpayer's proposed alternative calculation of consideration and
determine whether it is reasonable.
Based on the forgoing, the method of calculating the consideration proposed by the Petitioner
based upon the agreed amount of Consideration set forth in the Agreement is reasonable in light of
the fact that it represents the values negotiated for and contained in the Agreement between the
Transferor and the entities that control the Transferee.

DATED: March 21, 1996

/s/
DORIS S. BAUMAN
Director
Technical Services Bureau

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