Articles & Alerts
The Mysterious Taxes on Commercial Real Estate Leases – Part II
Recently, we informed you of some unique taxes imposed on lessees of commercial real estate. While those taxes are both counterintuitive and often overlooked, there are likewise taxes imposed on lessors of commercial real estate that too have mysterious applications. New York is not shy about levying tax on all sorts of transactions, including Commercial Rent Tax (CRT) on lessees, so it should not be surprising to learn that the state also imposes a tax, specifically a transfer tax, on the lessors of real estate in certain circumstances.
New York City Commercial Rent Tax
In general, New York State Real Estate Transfer Tax (RETT) is imposed on the lessor of real property conveyances with consideration of at least $500 at a rate of 0.4%. This rate is increased by an additional 0.25% when the consideration is $3 million or more for New York City residential real estate or $2 million or more for all other types of New York City real property. With regard to commercial leases, the RETT applies if the following criteria are met:
- The lease, including renewal options, is for more than 49 years;
- The lessee made, or may make, substantial capital improvements; and
- The lease includes at least 90% of the premises which constitutes the real property.
To calculate a lease’s tax base for the RETT, New York uses a present value calculation of the rental payments and renewal terms which are presumed to be exercised. In addition, an option to purchase the real estate is also considered taxable. Accordingly, an option to purchase the commercial property that is combined with a lease is subject to the transfer tax regardless of the length of the lease.
New York City Real Property Transfer Tax
Commercial leases in New York City may potentially also subject a lessor to additional transfer taxes. New York City’s Real Property Transfer Tax (RPTT) is imposed on transfers of real estate located in New York City when consideration exceeds $25,000 at a graduated rate of up to 2.625%, depending on the amount of consideration and type of property.
With regard to leases, there is an interesting connection between the RPTT and the CRT. Specifically, the RPTT rules exclude from taxable consideration rent payments that are within the definition of rent for CRT purposes. Consequently, the CRT exclusion substantially reduces, and often eliminates, a lessee’s exposure to the RPTT.
Interestingly, although tenants located in northern Manhattan and in the outer boroughs are not subject to the CRT, a taxpayer may nevertheless claim the RPTT exemption because the tax law does not require a lessee to be subject to the CRT to claim the exemption. Rather, the statutory language indicates that any payment that could be deemed rent for CRT purposes qualifies for the RPTT exemption, regardless of whether one is actually subject to the tax.
Taxes imposed on commercial leases are rare but can impact both lessees and lessors alike. Parties of a commercial lease need to be cognizant of the applicability of these taxes, which can significantly impact the overall economics of the lease and ultimately determine whether a lessor receives his expected return and/or a lessee’s expenses remain within budget.
If you have questions about the applicability of New York transfer taxes on your commercial leases, please contact Alan Goldenberg, Principal and Leader of the State and Local Taxation and Tax Controversy groups, or your Anchin Relationship Partner.