The Appellate Division has confirmed a decision of the New York City Tax Appeals Tribunal upholding the Tribunal’s narrow interpretation of a provision in the New York City real property transfer tax (“RPTT”) law that affords preferential tax treatment to qualifying transfers to newly formed real estate investment trusts (“REITs”). VCP One Park REIT LLC. v. N.Y.C. Tax Appeals Trib., No. 9102, 2019 NY Slip Op 03149 (1st Dep’t, Apr. 25, 2019). At issue was the proper application of the longstanding test that must be satisfied in order for a transaction to qualify as a REIT transfer.

Law. The RPTT law provides beneficial tax treatment for qualifying “REIT transfers” in two ways: first, by imposing the New York City transfer tax at only 50% of the applicable rate (1.3125% rather than 2.625%); and second, by measuring the taxable consideration based on the “estimated market value” shown in the most recent real property tax assessment notice for the property issued by the Department of Finance for the property, rather than based on the actual consideration. Admin. Code § 11-2102.(e)(1), (3). In order to qualify as a REIT transfer, the statute provides what is known as the “40% Test.” To satisfy that test, the “value of the ownership interests in the REIT . . . received by the grantor as consideration” must be equal to at least 40% of the “value of the equity interest” in the realty or economic interest conveyed by the grantor. Admin. Code §11-2102(e)(2) (C). At issue was whether, in applying the 40% Test, Administrative Code § 11-2102(e)(3) must also be applied. That section provides that “for purposes of determining the consideration for a [qualifying REIT] transfer . . . the value of the real property or interest therein shall be equal to the estimated market value as determined by” the Department of Finance on the most recent assessment notice for real property tax purposes (Emphasis added). It is common knowledge that the annual estimated market value on the Department’s property tax assessment notices is usually lower than the fair market value of the property.

Facts. On March 1, 2011, the grantor (One Park Avenue Mezz Partners LLC) transferred its 100% economic interest in real property located at One Park Avenue in Manhattan, which it owned through a tiered ownership structure, to two newly formed REITs. The grantor received consideration (cash and ownership interests in the REITs) of approximately $5.6 million, $3.375 million of which represented the ownership interests. At the time of the transfer, the real property was encumbered by a $375 million mortgage.

An RPTT Return was filed reporting the transaction as a qualifying REIT transfer, with the transfer tax computed at the reduced tax rate and using a $240 million estimated market value from the Department’s most recent notice of real property assessment as the taxable consideration. Transfer tax of approximately $3 million was paid by the grantees.

Following an audit, the Department concluded that the 40% Test was not satisfied, because the value of the REIT interests received by the grantor ($3.375 million) was only 39.13% of the total consideration of $5.6 million plus the $3 million transfer tax paid by the grantees, and therefore the transaction did not qualify as a REIT transfer. The Department assessed additional transfer tax of $10.8 million, plus interest. This litigation followed.

ALJ determination. In 2017, an Administrative Law Judge held that the transaction qualified as a REIT transfer, and was therefore taxable at the reduced tax rate and using the lower estimated market value as the consideration. The ALJ rejected the Department’s various arguments, including the claims that the use of the estimated market value did not apply to transfers of economic interests and that the 40% Test is meaningless where, as here, the $375 million mortgage is greater than the estimated market value, resulting in a negative equity. The ALJ concluded that therefore, by definition, the grantor’s interest was at least 40% of the equity, satisfying the 40% Test, and noting: “It is beyond the authority of this Tribunal to re-write the statute or substitute a different test.”

Tribunal decision. In 2018, the City Tribunal reversed, upholding the Department’s assessment, with some minor modifications, after concluding that the 40% Test was not met. The basis for the Tribunal’s conclusion (which did not appear to be what the Department had argued) was that the provision for use of estimated market value (Admin. Code § 11-2102(e)(3)) is superseded by the general definition of “consideration” contained in Administrative Code § 11-2101(9). According to the Tribunal, had the Legislature intended for the consideration to be equal to the Department’s estimated market value for the property, it would have expressly provided as such, as it did for other provisions in the RPTT law. Thus, the Tribunal held that using the actual consideration for the transfer meant that the $3.375 million valuation of the grantor’s interests in the grantee REITs was less than 40% of the actual consideration of $11.7 million (a different amount than the Department used), and thus the transfer did not qualify as a REIT transfer.

Appellate Division decision. The First Department, in a terse decision, has now confirmed the City Tribunal decision, concluding that the grantor failed to show that the Tribunal erred in its application of the 40% Test and in calculating the consideration subject to the higher tax rate.


The Appellate Division summary decision does not explain how it reached its conclusion, and anyone wanting to fully understand the issues will benefit from reading the City Tribunal’s decision along with the ALJ’s determination. The decision certainly will not encourage the formation of REITs in New York City, the principal purpose for the enactment of the REIT transfer provision. The decision fails to explain why the use of estimated market value under § 11-2102(e)(3) should not apply to the 40% Test set out in §11-2102(e)(2)(C), which measures the value of the ownership interests in the REIT against the “value of the equity interest” in the realty or economic interest conveyed. Many REIT transfers in New York City employed the same methodology that the City Tribunal and the Appellate Division have now invalidated. The Department did not acknowledge that the taxpayers’ reporting position in this case had been routinely accepted by the Department for many years. Unless the decision is reversed by the Court of Appeals, or remedial legislation is enacted, some REITs may now be subject to significant (and unexpected) transfer tax exposure.