In response to a ruling request from Holland & Knight, the New York City Department of Finance (DOF) issued a ruling (FLP-22-5024) holding that a homeless shelter owned and operated by a not-for-profit (NFP) entity is eligible for the Real Property Tax Law (RPTL) Section 420-a exemption (Tax Exemption) utilizing a leasehold condominium structure. This Holland & Knight alert describes a procedure by which the owner of real estate and an NFP organization providing temporary housing for the homeless can obtain a property tax exemption by the NFP acquiring a leasehold condominium unit rather than a lease of the space.


Basis for the Tax Exemption


Eligibility for the Tax Exemption is based on DOF Letter Rulings FLR-08-4886 issued on Feb. 13, 2009 (Cornell Ruling), and FLR-19-499, issued on Oct. 15, 2019 (collectively, the Rulings), which provide that an NFP acquiring property in the form of a leasehold condominium unit may qualify for a tax exemption under RPTL Section 420-a if the following requirements are satisfied: 1) the leasehold condominium must be devoted exclusively to non-residential purposes; 2) the underlying leasehold interest in the land must have a remaining term of 30 years or more upon acquisition of the unit; 3) the NFP, as the unit owner, must be required under the lease to pay both land and building taxes assessed on the unit; 4) the NFP must be organized for religious, charitable, hospital or educational purposes, or for the mental and moral support of men, women and children; and 5) the NFP must "own" the property.


Because ownership of property is a requirement, the Tax Exemption is not available to NFPs that only lease the properties they utilize. The Rulings do recognize, however, that the ownership test is met if an NFP owns a unit in a leasehold condominium. This is true even though the leasehold condominium and the unit would cease to exist upon the termination of the lease upon which it was based. Significantly, FLR-19-499 also provided that an NFP's eligibility for the Tax Exemption is not lost when a for-profit subsidiary of the fee owner also owns a separate leasehold condominium unit in the same condominium. In that situation, the NFP would obtain a Tax Exemption for just the part of the building it is using.


Typical Leasehold Condominium


The difference between a fee condominium and a leasehold condominium is that the common elements in a fee condominium include the land, whereas the common elements in a leasehold condominium include only the leasehold interest in the land. A leasehold condominium can be formed whether the NFP occupies an entire building, a portion of a building or a portion of an existing condominium. Although either the fee owner or the NFP can create the leasehold condominium, only the NFP can apply for the Tax Exemption and only if the NFP is responsible for the payment of the real estate taxes on its units. The leasehold condominium structure allows NFPs to be treated the same as they are treated in other states that permit NFPs to receive an exemption from paying real property taxes on leased facilities.


The basic structure of the transaction includes the following elements: 1) the fee owner and the NFP or an affiliate of the fee owner enter into a ground lease of all or part of an existing building or building to be built or renovated, including the land on which it is built (Ground Lease); 2) the Ground Lease must be for more than 30 years and requires that the tenant pay the real property taxes to the New York City (not just the excess tax over a base year); 3) the owner or lessee of the lease and the NFP execute a Purchase and Sale Agreement to sell one or more of the leasehold condominium unit(s) to the NFP for either a price based on the rent to be paid during the term of the Lease or, if the NFP is taking the entire building, for a purchase price based on or the rent that would have been paid under the operating lease if one had been executed; 4) the NFP, as the leasehold condominium's unit owner, would be obligated to perform the tenant's obligations under the Ground Lease; 5) the owner or lessor (or the NFP, if the NFP is taking over the entire building and forming the condominium) submits an application to the New York Attorney General (AG) for a No Action Letter (NAL) permitting the formation of the condominium; 6) after the condominium is formed, all or some of the leasehold condominium unit(s) are conveyed to the NFP but the NFP only can get a tax exemption for the units it owns; and 7) the NFP applies to DOF for the Tax Exemption. Only the NFP can apply for the Tax Exemption, and it cannot be obtained until after the NFP owns the leasehold condominium unit.


Concern About Homeless Shelters and Other Temporary Housing


The issue that was addressed in the ruling request was whether a homeless shelter or other temporary housing would be considered a "non-residential" purpose. An affirmative response by DOF would qualify the premises as "Property" under the Condominium Act and, therefore, the leasehold condominium could be formed and the premises would be eligible for the Tax Exemption utilizing the structure established in the Cornell Ruling. Holland & Knight argued that the characterization of the homeless shelter as a community facility under the Zoning Resolution of the City of New York (Zoning Resolution) is dispositive of the question as to whether the use of the premises is "non-residential" and, therefore, the premises is considered "Property" under the Condominium Act.


The Zoning Resolution defines community facilities to include "philanthropic or non-profit institutions with sleeping accommodations." In the Holland & Knight case, the shelter operator was an NFP that is operating a shelter that provides transitional housing, a secure location, guidance and education for adults referred by the New York City Department of Homeless Services (DHS). The shelter is, therefore, a community facility under the Zoning Resolution. Although the shelter is located in a "Residential District," which permits community facility uses "as-of-right," the shelter did not meet the definition of "residences" under the Zoning Resolution, which explicitly excludes "living or sleeping accommodations in community facility buildings." Other community facilities that contain sleeping accommodations include dormitories, long-term care facilities, hospitals, nonprofit hospital staff dwellings, monasteries and seminaries.


Holland & Knight also argued that an affirmative response was imperative to meet the public health and public interest needs of New York City and that DOF align its definitions of residential and non-residential use with the Zoning Resolution because the Zoning Resolution is utilized by the New York City Department of Buildings (DOB) in approving development in New York City. If the characterization of a use as non-residential by the Zoning Resolution and DOB were not dispositive of its characterization by DOF, developers and purchasers of property would not have certainty about whether their proposed uses were permitted until review by DOF, which occurs after the property is acquired by the NFP. This uncertainty could severely discourage developers from developing condominiums for NFP use that would be considered non-residential by the Zoning Resolution and, as explained below, by the New York State Attorney General office (AG's Office). Further, having separate definitions of residence for zoning purposes and taxation purposes would be an administrative burden on DOF.


In the Holland & Knight case, if the characterization of the shelter as community facility under the Zoning Resolution was not dispositive, shelters – along with dormitories, staff housing at hospitals and possibly hospitals themselves – may not be built because the NFPs would not have a clear understanding of whether they would qualify for the Tax Exemption. Each of these uses is critically important to New York City. This burden, and the increased cost to New York City for shelter operations, would be antithetical to the policies set to assist those who need housing assistance, and it would be a very deleterious hardship to NFPs that have spent the last three years trying to survive the pandemic.


In looking at the distinction between "residential" and "non-residential" uses in the definition of "Property" under the Condominium Act, the basis for the distinction is the protection of residential consumers, which is not necessary nor applicable when considering homeless shelters. Pursuant to GBL Section 352-e, an offering plan disclosing the material terms of a real estate offering (Offering Plan) must be filed with the AG's Office prior to a public offering of real estate interests in or from the state of New York. However, any person or entity intending to offer or sell real estate interests in or from the state of New York may request a letter from the AG's Office (No Action Letter) stating that the AG's Office will take no action with respect to such person or entity's failure to file or register pursuant to GBL Sections352-e or 359-e.

The threshold question for the AG's Office with respect to the creation of any condominium via an Offering Plan or a No Action Letter is whether consumers require the protection of an Offering Plan. In a condominium created for "residential" use (meaning, the individual condominium units created will be sold as residences to private individuals), the protection of an Offering Plan is required. This is because consumers purchasing residential condominium units were deemed to be entitled to certain protections when the relevant sections of the GBL were enacted. Conversely, in a condominium created for "non-residential" use (meaning, the individual condominium units created will not be sold as residences), an Offering Plan is unnecessary, and the condominium can be created pursuant to a No Action Letter. This is due to the fact that the condominium units will be owned by sophisticated parties who are not consumers that require the protection of the AG's Office.


With respect to leasehold condominiums specifically, the Condominium Act seeks to protect residential unit owners by excluding leases devoted to residential purposes from the definition of "Property." A leasehold condominium is generally created by the fee owner of a property ground leasing the land and building to another entity, which entity uses the leasehold interest in the land and building as a basis for the creation of a condominium. For residential unit owners, the ground lease structure is inferior to a traditional ownership structure because the ground lease has an expiration date. As that expiration date comes near, it becomes virtually impossible for the residential unit owner to sell his or her residential unit, as it is difficult for the new purchaser to obtain financing, and the value of the residential unit disappears when the ground lease terminates. Alternatively, a sophisticated party that owns a leasehold condominium unit, containing rental tenants or an NFP use, has been fully apprised of the terms, is making a business decision to own leasehold condominium units and very likely has been involved in negotiating the term of the ground lease. With a homeless shelter, the shelter operator and the individuals it supports are benefitted by the leasehold condominium structure because it enables the shelter operator to obtain the Tax Exemption. The individuals are not affected by the market value of the Leasehold Condominium Units decreasing as the end of the Ground Lease term nears; the shelter provides a service to the individuals, not an asset. For those reasons, the shelter does not require the protections offered to condominium units that are owned by "residential" unit owners.


DOF Rules in Favor of the Homeless Shelter


In responding to Holland & Knight's ruling request, DOF wrote:


"When the Condominium Act was amended in 1974 to include subdivision 11 the legislature's intent was clear in that the "devoted exclusively to non-residential purposes" was to allow the condominium development owner more flexibility in dedicating certain amount of the common interest to commercial purposes. Here, the non-profit entity is dedicated to serving the unhoused population of New York City. Its use will not be to provide residences, but rather, to provide temporary emergency housing and housing support. Thus, the non-profit entity would be using the leasehold condominium for a non-residential purpose and may enter into a leasehold condominium agreement."


Accordingly, the current Ruling reaffirmed the Cornell Ruling and the use of leasehold condominiums to provide NFPs the ability to obtain the Tax Exemption and also clarified the meaning of the "residential" limitation in the Condominium Act.


For more information on this ruling, contact the authors.