In New York, a “leasehold condominium” structure is sometimes used to allow not-for-profit corporations (NFPs) to obtain an exemption from real estate taxes under Real Property Tax Law Section 420-a (the “420-a tax Exemption”).
What is Section 420-a?
Section 420-a of the of the New York State Real Property Tax Law, entitled "Nonprofit organizations; mandatory class,” pertains to tax exemptions available to certain non-profit organizations.
To be eligible for a real property tax exemption under Section 420-a, the real property must be:
owned by a non-profit entity organized or conducted exclusively for one or more of the purposes listed in section 420-a—"religious, charitable, hospital, educational, or moral or mental improvement of men, women or children purposes, or for two or more such purposes."
used exclusively for carrying out one or more of the purposes listed in section 420-a. Any portion of the property that is not so used is subject to taxation.
The exemptions authorized by Section 420-a provide the framework for non-profit entities to create eligible ownership structures for certain real property.
Understanding Leasehold Condominiums and Section 420
In one such structure, a leasehold condominium arrangement entails the creation of a leasehold interest within an existing fee condominium, thereby establishing what we refer to as an "internal condominium." This internal condominium serves as the linchpin for NFPs seeking eligibility under Section 420. However, the intricacies of this structure may vary depending on factors such as the underlying ownership of the fee, the relationship of the parties, and the use of each space in the building. This structure is aptly called a “condominium in a condominium.” In this alert, we refer to the former (i.e., the condominium created from the leasehold interest in an existing fee condominium) as the “internal condominium.”
How internal condominiums are created
In one iteration, the “condominium in a condominium” structure requires the creation of a fee condominium, the lease of one (or more) fee condominium units to an NFP, and the creation by that NFP of the internal condominium based on its leasehold interest in one (or more) condominium units. In another iteration, the fee condominium unit(s) are leased to an affiliate of the fee owner who creates the internal condominium, and the leasehold units of the internal condominium are sold to an NFP. Regardless of the specific approach, the outcome remains consistent: the NFP becomes the owner of the leasehold condominium units within the internal condominium, fulfilling one of the prerequisites for the 420-a tax Exemption.
Requirements and thresholds
Generally, a condominium consists of at least two units. When a “condominium in a condominium” is formed, from a technical standpoint, the unit (or tax lot) on which the internal condominium is based will be “dropped” from the New York City tax map (although the unit will still exist for purposes of the function of the fee condominium—for example, for the assessment and payment of common charges). If the fee condominium initially consisted of only two units to start (say, one for retail space and one residential use), dropping one of those lots is an issue for the New York City Department of Finance (DOF) because the fee condominium would be left with only one tax lot—which, from DOF’s perspective, could invalidate the fee condominium. Recently, to avoid this situation, DOF instituted a requirement to ensure that the fee condominium always consists of at least two tax lots. In any “condominium in a condominium” structure, the initial fee condominium must consist of a minimum of three tax lots right from the outset. This ensures that, even after dropping the tax lot associated with the internal condominium, the fee condominium will always retain at least two units.
A practical approach
For property owners contemplating the utilization of a leasehold condominium structure, a proactive strategy is recommended. To lay the groundwork for potential future use, it's advisable to initiate with a fee condominium comprising a minimum of three units/tax lots.
Our Cooperatives & Condominiums team is committed to keeping you informed about developments in leasehold condominium regulations and how these changes impact, and create opportunities for, developers and owners. To learn more about leasehold condominiums, see:
- DOF ruling clarifies homeless shelters qualify for 420-a tax exemption
- The benefits of leasehold condominiums for nonprofits
- Department of Finance confirms leasehold condominium § 420-A property tax exemption eligibility for nonprofits