Commercial Leasehold Condominium Basics

New York Real Estate Journal
Thomas D. Kearns

New York Real Estate Journal recently published an article written by Olshan Real Estate partner Thomas Kearns entitled “Commercial Leasehold Condominium Basics.” The article presents the basics of commercial leasehold condominiums and how not-for-profit tenants can benefit from this arrangement. Pursuant to New York’s condominium statute, a lease for commercial uses with a term of at least 30 years can be converted into a condominium. “The primary reason lawyers use leasehold condominiums is to permit a not-for-profit tenant to benefit from a property tax exemption under Section 420-a of New York’s Real Property Tax Law,” which, Mr. Kearns explains, “provides a tax exemption to not-for-profits which own property in New York.” Furthermore, “Section 339-e (11) of New York’s Real Property Law defines property as including land held in condominium form used for non-residential purposes which is subject to a lease with at least a 30-year term.” In 2009, the New York City Department of Finance (DOF) confirmed in a letter ruling that a not-for-profit holding title to a unit in a leasehold condominium with at least a 30-year lease term is entitled to the Section 420-a tax exemption since the Real Property Law defines property to include a lease with at least a 30-year term. Mr. Kearns points out that “the simplest form of a leasehold condominium is a lease of an entire building from the fee owner to the not-for-profit” and briefly outlines the steps involved in that process. However, he cautions, this setup can be complicated, as when, for example, a building includes for-profit retail space, to which the tax exemption would not apply. He recommends that the tenant’s counsel “be sure that the lease permits an assignment of the lease to the board of managers of the condominium since New York condominiums are typically not incorporated,” while the landlord’s counsel “must be certain that the condominium regime applies only to the leasehold estate, not the fee estate.” Lastly, Mr. Kearns remarks on a point of contention, namely, “whether the words ‘devoted exclusively to non-residential purposes’ in Section 339-e (11) mean that no residential purposes of any kind may exist in the building or that the condominium units themselves may not be individually sold as residential apartments.” He concludes, “I have heard that some lawyers have obtained no-action letters from the attorney general for a single large residential unit consisting of a group of apartments constituting affordable housing but not for market rate housing which, of course, is a distinction not in the statute.”        

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