Over two years ago, I discussed an exciting taxpayer victory for New York City Real Estate Investment Trust transfers. (March 13, 2017 post) As my regular readers know, to encourage additional liquidity in the real estate market, both New York State and City have provisions in place that effectively cut the tax rate in half for transfers to real estate investment trusts (REITs). Without the incentive, combined tax rates can reach as high as 3.275% of the “consideration paid” for the property.
In addition to providing a rate reduction, the NYC tax has the added bonus of using the estimated market value (EMV), an amount determined by reference to the NYC real property tax assessment and usually significantly less than the actual fair market value of the property, in determining the consideration subject to the Tax.
Obtaining the REIT transfer tax benefits are not without difficulties. The issue in the case at hand revolved around the requirement that the transferor of the real property receive an ownership interest in the REIT equal to an amount not less than 40% of the equity interest in the transferred property.
For simplicity’s sake, let’s assume that the EMV of the property was $100 million and debt on the property was $400 million. This would result in the seller having a pre-transfer equity interest of something less than zero. The New York City Department of Finance argued that the EMV should only be used to compute the actual transfer tax ($100 million multiplied by the tax rate) but fair market value should be used to determine whether or not the 40% equity requirement was met.
The Administrative Law Judge (ALJ) was very clear in affirming the statute is not ambiguous and the Legislature intended the taxpayer to receive the $10 million benefit of the REIT provision. Unfortunately, as I cautioned back in 2017, ALJ decisions are not binding authority and the Tax Appeals Tribunal reversed the decision (reference September 4, 2018 blog).
We knew the odds of the Appellate Division overturning the Tribunal were extremely high and the Decision was affirmed in late April.
While the significant advantages of REIT transfers were in no way impinged by this Decision, any owner considering taking advantage of the favorable transfer tax rates needs to do so with a great degree of care and planning.
For advice and insights based on your circumstances, contact me at email@example.com or your Berdon Advisor.
Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.