September 14, 2021

Regulatory Changes Impact Leasehold Condominiums in New York

Holland & Knight Alert
Stuart M. Saft | Renee I. Covitt


  • The New York City Department of Finance and the New York State Attorney General's Office have made recent subtle changes with regard to the establishment and operation of leasehold condominiums that are formed to enable nonprofit entities to obtain real property tax exemptions on space that was traditionally leased.
  • This Holland & Knight alert gives background on the tax exemption and the leasehold condominium structure, reviews the recent regulatory changes and lists key considerations that they raise for nonprofit organizations in New York City.

The leasehold condominium structure has become a popular way for landlords and nonprofit entities to establish or modify their relationship to permit space that the nonprofit would formerly lease to qualify for a real property tax exemption. Recently, both the New York City Department of Finance (DOF) and the New York State Attorney General's Office (NYAG) have made subtle changes with regard to the establishment and operation of leasehold condominiums that are formed to enable nonprofit entities to obtain real property tax exemptions on space that was traditionally leased.

Basis for the Tax Exemption

The tax exemption is based on DOF's Letter Rulings FLR-08-4886 issued on Feb. 13, 2009, and FLR-19-499 issued on Oct. 15, 2019 (the Ruling), which provides that a not-for-profit organization acquiring property in the form of a leasehold condominium unit may qualify for a real estate tax exemption under New York State Real Property Tax Law (RPTL) §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 unit owner must be required under the lease to pay both land and building taxes assessed on the unit; and 4) the not-for-profit must satisfy all of the ownership and use criteria for exemption as set forth in RPTL §420-a.

RPTL §420-a provides a tax exemption from real property taxes for nonprofit organizations, which are organized for religious, charitable, hospital or educational purposes, or for the mental and moral support of men, women and children, that "own" property in New York. Generally, tax exemption available under RPTL §420-a is not available to nonprofits that lease rather than own the properties they utilize since ownership is the precondition even if the nonprofit pays the real property taxes and the exemption is available only if the property is used for nonprofit purposes. The DOF's Rulings recognized that the ownership of a unit in a leasehold condominium is the ownership of property, even though the leasehold condominium and the leasehold condominium unit would cease to exist on the termination of the lease upon which it was based. The 2019 PLR also provided that a nonprofit'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. Accordingly, the for-profit use of a different part of the building does not affect the tax exemption of the nonprofit's unit owner in the same condominium, even if the affiliate is owned and controlled by the fee owner. In that situation, the nonprofit would obtain a tax exemption for only 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, while the common elements in a leasehold condominium include only the leasehold interest in the land. The leasehold condominium structure works regardless of whether the nonprofit takes the entire building, a portion of a building, or one or more floors in an existing condominium, although the documents differ substantiating the ownership as well as the complexity of the transaction. Although either the fee owner or the nonprofit can create the condominium, only the nonprofit can apply for the tax exemption and only if the nonprofit is responsible for the payment of the real estate taxes on its units. This structure treats nonprofits the same as they are treated in other states that permit nonprofits 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 nonprofit or an affiliate of the fee owner enter into a ground lease of all or part of the existing building or a building to be built or renovated, including the land on which it is built (the Ground Lease); 2) the Ground Lease must be for more than 30 years from the condominium's formation and requires that the tenant pay the real property taxes to the City of New York and not just the excess tax over a base year; 3) the owner or lessee of the lease and the nonprofit execute a purchase and sale agreement to sell one or more of the leasehold condominium unit(s) to the nonprofit for either a price based on the rent to be paid during the term of the lease, or for a purchase price based on the rent that would have been paid under the operating lease if one had been executed or if the existing operating lease is replaced by the leasehold condominium structure; 4) the nonprofit, 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 nonprofit, if the nonprofit is forming the condominium) submits an application to the NYAG 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 nonprofit; and 7) the nonprofit applies to DOF for the tax exemption. Only the nonprofit can apply for the tax exemption, and it cannot be sought or obtained until after the nonprofit owns the leasehold condominium unit.

In the event that the nonprofit is taking only part of a building regardless of how large (e.g., 99 percent of the building) or how small (e.g., 1 percent of the building), the Ground Lease must still be for the entire building and must be for at least 30 years from the condominium's formation.

In the event that the property is encumbered by a mortgage and the mortgagee has to approve the structure and the transaction, there should not be any difficulties obtaining the waiver because the entire leasehold condominium is only a lease – the tenant's interest in which becomes a condominium.

In a situation where the property is already a condominium, a more complicated structure is required in order to satisfy DOF's requirement that the nonprofit actually own property. Although several approaches have been utilized in the past, in 2019 DOF issued a procedure recognizing the "condo-within-a-condo" (CWC) structure, which entails creating a separate condominium (and not just a unit) within the existing condominium unit. In this approach, the leasehold condominium would exist solely of an existing unit. The leasehold interest in the unit, which includes a leasehold interest in the land, must have a remaining term of more than 30 years upon the nonprofit's acquisition of the nonprofit unit. The nonprofit must be required under the lease to pay both land and building taxes assessed on the nonprofit unit. The nonprofit would also have to satisfy the ownership and use criteria for the exemption as described in RPTL §420-A.

Essentially the CWC structure requires that the owner of a unit within a condominium (the Original Unit) leases the Original Unit to an affiliate or a nonprofit (the Original Unit Tenant) for a period of more than 30 years. The Original Unit Tenant then executes a Condominium Declaration and has tax maps prepared, which creates a separate condominium (the CWC Condominium) within the Original Unit. The declarant of the CWC Condominium then deeds the newly created unit (the CWC Unit) to a nonprofit. When the procedure is completed, the Original Unit still exists and is owned by the Original Unit Tenant, and the nonprofit owns the CWC Unit and can apply for a tax exemption for it. As a result of issues relating to DOF's computer, the condo-within-a-condo cannot be directly reflected on the tax map, so the new lots resulting from the condo-within-a-condo are typically processed as an apportionment of the original condo and are reflected on tax maps by a special label that includes the designation of "CC."

Recent Changes


In order to form the leasehold condominium, a NAL must be obtained from the NYAG. Apparently as a result of its issuing far more NALs than leasehold condominiums were formed, the NYAG now requires that the Ground Lease or other lease formed as the basis for the leasehold condominium be executed prior to the NYAG issuing a NAL. Previously, the NAL would be obtained at the beginning of the process so that the declaration and tax maps could be filed with DOF as soon as everything else was signed. Now, however, the NAL cannot be sought first, which adds approximately a month to the time it takes to form a leasehold condominium. With processing time at DOF typically taking three to four months, forming a leasehold condominium will take approximately six months. On a condo-within-a-condo where a fee condominium has to first be formed, it typically takes approximately 10-12 months to complete both actions.

DOF Revocation

DOF has implemented a policy pursuant to which properties used by nonprofits with a property tax exemption as a result of RPTL 420-a will have their tax exemption revoked if there is the presence of Class 1 New York City Department of Building (DOB) violations on the property, regardless of the nature of the violations or whether the violation actually impacts the exempted use of the premises. A Class 1 violation is a condition that severely affects life, health, safety, property, the public interest or a significant number of persons and requires immediate corrective action. DOF's new policy is that the tax exemption will not be reinstated, and no appeals will be granted, until after the violation is removed. Accordingly, all nonprofits must regularly check with DOB to make sure that there are no Class 1 violations on the building in which its leasehold condominium is utilized.

DOF Drops Base Lot

When a fee condominium is created, DOF drops the original base lot and only the fee condominium lots remain. However, DOF is now dropping the fee lot when a leasehold condominium is formed, which presents an issues for the fee owner that needs to be addressed administratively by DOF. Although dropping the base lot makes sense for a fee condominium, it creates an issue for the fee owner if the leasehold condominium lots replace the fee lot because the fee owner still owns the land. Note: DOF's computer system currently does not allow for the base lot to remain in place with leasehold lots overlaid, although when DOF began the process of permitting the CWC structure, DOF was able to provide for it in its computer system so that there could be two different kinds of lots. This problem needs to be addressed or the fee owner may not be able to obtain the benefit of its ownership of the land. Holland & Knight has formulated a system to protect clients in this situation, but an administrative remedy is required and should not be difficult to construct.


Leasehold condominiums provide a tremendous advantage for New York City's nonprofit organizations by reducing their operating expenses and enabling them to serve more people with their important services. Thus, many stakeholders have the view that the growth of leasehold condominiums should be facilitated and not reduced. For more information about New York's recent regulatory changes or questions specific to your organization, contact the authors.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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