1. (a) Creation of a taxable lease or sublease not coupled with an option to purchase. The creation of a lease or sublease is a conveyance subject to tax only where:

   1. (1) the sum of the term of the lease or sublease and any options for renewal exceeds 49 years; and
   2. (2) substantial capital improvements are or may be made by or for the benefit of the lessee or sublessee; and

   3. (3) the lease or sublease is for substantially all of the premises constituting the real property. Substantially all means ninety percent or more of the total rentable space of the premises, exclusive of common areas. For the purpose of determining whether a lease or sublease is for substantially all of the premises constituting the real property, premises shall include, but not be limited to the following:

      1. (i) an individual building, except for space which constitutes an individual condominium or cooperative unit;
      2. (ii) an individual condominium or cooperative unit; or
      3. (iii) where a lease or sublease is of vacant land only, any portion of such vacant land.

2. (b) Consideration in the case of the creation of a taxable lease or sublease.

   1. (1) In the case of the creation of a lease which constitutes a conveyance subject to tax, the consideration used to compute the tax is the present value of the right to receive rental payments or other payments attributable to the use and occupancy of the real property. Such consideration also includes the present value of rental or other payments attributable to any renewal term. In the case of the creation of a taxable sublease, the consideration is computed in the same manner as in the creation of a taxable lease except that the value of the remaining prime lease rental payments must be subtracted.

   2. (2) A discount rate equal to 110 percent of the federal long-term rate compounded semiannually, which is determined pursuant to section 1274(d) of the United States Internal Revenue Code, is required to be used in determining the present value of such payments which constitute consideration in the case of the creation of a taxable lease or sublease. Such federal long-term rate in effect 30 days prior to the date of transfer shall be used when computing such discount rate. If the taxpayer establishes:

      1. (i) that a discount rate which is greater than 110 percent of the federal long-term rate is appropriate in his or her particular circumstances; and
      2. (ii) that using a discount rate equal to 110 percent of the federal long-term rate results in the computation of consideration which exceeds the fair market value of the real property subject to the lease or sublease, the department will allow the use of a discount rate that results in a computation of consideration that is equal to the fair market value of such real property. The discount rate is applied to net rents. Net rents means the amount by which gross rents exceed the lessor's or sublessor's operating costs. Such operating costs include amounts paid for heat and gas, electricity, furnishings, insurance, maintenance, management and real estate taxes.
   3. (3) When net rents are tied to unknown factors, a reasonable estimate thereof must be made by the taxpayer. Such estimate shall reflect the probability that an amount of income will be received or expense incurred, as well as the factors affecting the range on contingent amounts.
   4. (4) Operating expenses paid directly to third parties by the lessee or sublessee, for example, under a net lease, are not included in gross rents, nor are they deductible as operating costs.

   5. (5) If the lease specifies that the lessor will pay a fixed amount of operating expenses, the lessor may deduct such amount from gross rents in computing net rents. If there is no itemization of the operating costs paid by the lessor and, according to the terms of the lease, the lessor must pay such costs, the lessor may make a reasonable estimate of such costs in accordance with subdivision (b) (3) of this section. If the lessor pays one or more of the following operating costs and (i) there is no itemization in the lease for such costs and (ii) no reasonable estimate is made, then the following percentages of gross rentals will be presumed attributable to the following costs: Example 1: Example 2: Example 3: Example 4:

      Heat and gas	15 percent
      Electricity	5 percent
      Furnishings	5 percent
      All of the above	25 percent

      Example 1:

      A, as lessor, creates a lease with B as lessee. The lease is for a term of 60 years and covers an entire office building owned by A. The terms of the lease allow B to make substantial capital improvements to the building. The gross rents to be received by A over the term of the lease total $5 million. Operating costs are estimated to be $2 million. Net rents total $3 million (gross rents of $5 million less operating costs of $2 million paid by A). The present value of net rents is $550,000.

      Since all three conditions set forth in subdivision (a) of this section are met, the creation of the lease constitutes a conveyance subject to tax. The taxable consideration is $550,000, the present value of net rents. The total tax due, at the rate of $2 for each $500 of consideration, is $2,200.

      Example 2:

      Same facts as in example 1, except that this lease is for a term of 30 years with no option to renew included. Since the lease is for a term of less than 49 years, the creation of the lease is not a conveyance subject to the transfer tax.

      Example 3:

      Same facts as in example 1, except that the lease created between A and B has a fixed term of 30 years and B is granted an option to renew the lease at the end of the fixed term for another 30 years. This would be treated as the creation of a 60 year lease and, therefore, would be a taxable conveyance. The consideration used to compute the tax includes the present value of the net rental payments to be received during the fixed term and the renewal term.

      Example 4:

      Corporation Z owns a ten story building. Corporation Z creates a 60 year lease with corporation Y as tenant, such lease covering five floors of the building (50 percent of the premises). Since the lease covers less than 90 percent of the rentable space of the premises, the creation of the lease is not a conveyance subject to the transfer tax.

3. (c) Creation of a lease for less than 49 years coupled with the granting of an option to purchase.

   1. (1) An option to purchase real property is an interest in real property. Where an option to purchase real property is coupled with the granting of the right to use and occupancy of the real property, a conveyance subject to the transfer tax has occurred. Therefore, the creation of a lease coupled with the granting of an option to purchase the real property, regardless of the term of the lease, is a conveyance subject to the transfer tax.

   2. (2) In the case of the creation of a lease for less than 49 years, coupled with the granting of an option to purchase, the consideration is the present value of the net rental payments under the lease plus the consideration paid for the granting of the option to purchase. Rental payments for periods that occur after the last date that the property may be purchased, if the option is exercised, are not included in the calculation of the present value of the rental payments.

      Example:

      A, as lessor, creates a lease of a building with B as lessee. The term of the lease is 20 years. The lease contains an option to purchase the building which is exercisable through the tenth year of the lease. If the option is exercised, the lease provides that the property will be transferred to B not later than 6 months after the option is exercised. B paid $10,000 specifically for the granting of the option. Since this is the granting of an option with use and occupancy, the transaction is subject to the transfer tax. The consideration used to compute the tax would be the present value of the net rental payments to be received from the effective date of the lease through the expiration of the first ten years and six months of the lease, which is the period during which the property may be purchased pursuant to the option to purchase, plus the $10,000 paid for the granting of the option.

4. (d) Assignments and surrenders of leases, options and contracts.

   1. (1) An interest in real property includes a leasehold interest and an option or contract to purchase real property. Therefore, the transfer of a leasehold interest, regardless of the term, or the transfer of an option or contract to purchase real property, by assignment or surrender, is a conveyance subject to tax.

   2. (2) The consideration in the case of an assignment of a leasehold interest or an option or contract to purchase real property is the amount paid for the assignment by the assignee to the assignor, i.e., the lessee under the lease or the person who is assigning his rights to purchase the property under the option or contract. The consideration in the case of a surrender of a leasehold interest or option or contract to purchase real property is the amount paid for the surrender by the lessor to the lessee or by the owner of the real property to the person who is surrendering his rights to purchase the property under the option or contract. However, no tax will be imposed in the case of an assignment of a leasehold interest or an option or contract to purchase real property if the assignor pays consideration to the assignee to accept the assignment. Further, no tax will be imposed in the case of a surrender of a leasehold interest or an option or contract to purchase real property if the lessee or the person who is surrendering his rights to purchase the property under the option or contract pays consideration to the lessor or owner of the real property to accept the surrender. Example 1: Example 2: Example 3: Example 4: Example 5:

      Example 1:

      A, a lessee under a 30 year lease, enters into an agreement to assign the leasehold interest to B, who will replace A as tenant under the lease. B agrees to pay A $500,000 for the leasehold interest. The assignment of A's leasehold interest to B is subject to tax at the rate of $2 for each $500 of consideration resulting in a tax due of $2,000.

      Example 2:

      X is the owner of a building which is leased to Z under a 20 year lease which has 10 years remaining under the terms of the lease. X wishes to cancel the lease before it expires and, therefore, enters into an agreement with Z whereby X will pay Z $400,000 to surrender the lease. The surrender of the leasehold interest by Z is subject to tax at the rate of $2 for each $500 of consideration, resulting in a tax due of $1,600.

      Example 3:

      Same facts as in example 2 except that Z is the party motivating the cancellation of the lease and, therefore, Z agrees to pay X to accept the surrender of the lease. No tax would be due since Z, the grantor, is not receiving consideration for the conveyance.

      Example 4:

      A is the purchaser/contract vendee under a contract to purchase real property. A agrees to assign all rights under the contract, including the right to use and occupancy of the property, to B for $100,000. The assignment of the contract is subject to tax at the rate of $2 for each $500 of consideration, resulting in a tax due of $400.

      Example 5:

      Same facts as in example 4 except that the real property under contract is a single family residence which A used solely as a personal residence under a lease. The assignment of the contract would be exempt from tax. (See section 575.9[c][10] of this Part.)

Tax Law, §§ 1401(d), (e), (f)