In an Advisory Opinion issued near the end of 2016, the New York State Department of Taxation and Finance has determined that the transfer of real property in New York State from an “exchange accommodation titleholder” to a taxpayer in connection with a so-called “reverse” like-kind exchange under Section 1031 of the Internal Revenue Code is not subject to the New York State Real Property Transfer Tax. In the more typical or “forward” like-kind exchange, a taxpayer sells real property (the “relinquished” property) and deposits the proceeds from such sale with a qualified intermediary.  Subject to the rules established under IRC Section 1031, the qualified intermediary holds the proceeds until the taxpayer has identified one or more “replacement” properties and the proceeds are then held by the qualified intermediary are used to acquire the “replacement” property or properties.  In a “reverse” exchange, the “replacement” property is acquired before the “relinquished” property is sold by way of an “exchange accommodation titleholder” or EAT.  The EAT holds title to the “replacement” property (generally using a newly-formed limited liability company that is disregarded for tax purposes) until the taxpayer transfers the “relinquished” property.  The Advisory Opinion concisely describes the process of a “reverse” exchange and the rules governing “reverse” exchanges.

The taxpayer provides the funds used by the EAT to acquire the “replacement” property; the EAT does not use any of its own funds.  The funds provided to the EAT are generally evidenced by a promissory note and secured by a mortgage on the “replacement” property.  The taxpayer is also responsible for maintaining the “replacement” property, usually by way of a lease.  The EAT leases the “replacement” property to the taxpayer until the exchange is concluded, with the rent paid to the EAT being consistent with the debt service payments made by the EAT on the mortgage securing the loan from the taxpayer for the funds used by the EAT to acquire the “replacement” property.

The opinion examines the exemption to the payment of the Real Estate Transfer Tax allowed under Tax Law § 1405(b)(4) with respect to “conveyances of real property without consideration and otherwise than in connection with a sale, including conveyances of realty as a bona fide gifts.”  The opinion further states that two conveyances are made for consideration in a “reverse” exchange: the purchase of the replacement property by the EAT and the sale of the relinquished property by the QI to a purchaser.  The EAT is considered to be acting as the agent of the taxpayer by holding title to the “replacement” property for the purpose of timing under a like-kind exchange, no consideration was found to have been provided for the conveyance of the “replacement” property from the EAT to the taxpayer, thus qualifying for the exemption under Tax Law § 1405(b)(4).  In addition, the fees that the EAT receives from the taxpayer for its services in acting as the “exchange accommodation titleholder” were not deemed to be consideration subject to taxation.

As a side note, the New York City Department of Finance came to a similar conclusion in a letter ruling back in 2003 as to properties located within New York City with respect to the application of the New York City Real Estate Property Transfer Tax; the full text can be found here.  The full text of the Advisory Opinion from the New York State Department of Taxation and Finance can be found here.

In a recent tax court case, Holy Trinity Baptist Church v. City of Trenton (Docket No. 015909-2014, February 2, 2017), the court overturned the findings of the County Board of Taxation and upheld the tax exemption for religious/charitable use of properties pursuant to N.J.S.A. 54:4-6.3.  This statute exempts properties from taxation where “buildings [are] actually used in the work of associations and corporations organized exclusively for religious purposes, including religious worship, or charitable purposes.”  The Holy Trinity decision comes at a time when municipalities are aggressively challenging tax exemptions and was preceded by two other significant tax court cases discussed below.

Commencing with the tax court’s decision in AHS Hospital Corp. v. Town of Morristown, 28 N.J. Tax 456 (Tax 2015), involving the Morristown Memorial Hospital, it appears that elevated scrutiny by municipalities is calling the exempt status of many non-profit organizations into question.  In Morristown Memorial, the tax court found that the hospital’s entanglement with for-profit activities undermined the hospital’s ability to satisfy the well-recognized three prong exemption test.  This test requires an organization to establish that:  1) The organization is a New Jersey non-profit entity; 2) The non-profit entity is acting consistent with its charter in the performance of religious/charitable functions; and 3) The activities performed on the property are not conducted for profit.  Paper Mill Playhouse v. Millburn Township, 95 N.J. 503 (1984).  In reaching its conclusion the court in Morristown Memorial focused on the hospital’s failure to satisfy the third prong of the test.  In part, the court concluded that the activities conducted and services provided by the many private, for-profit physicians, dictated a finding that a significant portion of the hospital facilities were in fact being used for profit.  The court there also concluded that it was unable to distinguish and segregate those portions of the hospital facilities where the involvement of for-profit activities did not apply.  Consequently, other than in the most distinct and limited areas (e.g., the hospital parking garage, auditorium and in-house fitness center), the hospital facilities were deemed to be taxable.

More recently, the tax court was asked to focus on the exemption afforded non-profit universities.  In Fields v. Trustees of Princeton University, a group of third-party taxpayers challenged the exemption afforded Princeton University.  Although that matter was resolved without a trial, it appears the settlement may have been precipitated by the University’s concern with what has been widely perceived to be an increasingly unfriendly environment for the exempt treatment of non-profits in the aftermath of the Morristown Memorial decision.  The settlement, which only temporarily resolves the ultimate exemption question, requires the University to pay over $18 million dollars in payments to third-parties and contributions to the municipality (in the form of payments in lieu of taxes) through the year 2022 when the University’s settlement obligations expire.

With this recent history and the presence of numerous pending cases specifically attacking the exemptions afforded non-profit hospitals throughout the state, the tax court’s decision in Holy Trinity may offer non-profits, at least religious organizations, some solace from what appears to be a concerted effort on the part of municipalities to challenge the efficacy of real property tax exemptions in all areas.  Importantly, the Holy Trinity court concluded that despite evidence indicating that religious activities on the subject church property had diminished (as the church purchased a new property for its operations and had already commenced the process of shifting its activities to this new location), the church continued to make actual use of the property in furtherance of its religious purposes.  In particular, the Holy Trinity court found that the church continued its schedule of weekly meetings, made the space in question available for future meetings and gatherings, conducted receptions, and stored books at the location in connection with its religious/charitable functions.  As a result, the continued application of the tax exemption was determined to be appropriate in Holy Trinity.

The Holy Trinity court also made clear that neither an intent to sell the property nor diminished use of otherwise exempt property in of itself will destroy the tax exemption.  The court’s decision is consistent with City of Hackensack v. Bergen County, where the listing of the property for sale and removal of certain items to increase the marketability of the property were found to be insufficient to undermine the exemption.  Id. 405 N.J. Super. 35 (App. Div. 2009).  Further, the Holy Trinity court acknowledged that a property remains exempt even where a property’s use is limited to the occasional storage of goods used in furtherance of religious and charitable purposes.  Borough of Hamburg v. Trustee of Presbytery of Newton, 28 N.J. Tax 311, 319-320 (Tax 2015).

Consequently, in the current ratable hungry environment, non-profit organizations must now be more vigilant in ensuring that their properties continue to be used for the organization’s exempt or charitable purposes.  Only by regularly reviewing the entity’s activities and documenting continued property usage for its non-profit purposes, can these organizations improve the prospect of preserving the significant benefits that flow from application of this statutory exemption.

The Third Circuit Court of Appeals issued a precedential opinion last week when it ruled that a New Jersey real estate developer had standing to pursue antitrust claims against the owner of a nearby ShopRite who engaged in anti-competitive activities designed at blocking the developer from bringing a Wegmans to its property.

In the case of Hanover 3201 Realty, LLC v. Village Supermarkets, Inc., et al., a developer, Hanover 3201 Realty, LLC (“Hanover Realty”), signed a contract with Wegmans to develop a full-service supermarket at its Hanover, New Jersey property.  The contract required Hanover Realty to secure all necessary governmental permits and approvals within two years, otherwise Wegmans could walk.  Soon thereafter, Village Supermarkets, Inc. (“Village”), the proprietor of a ShopRite supermarket in Hanover (in addition to two dozen others throughout New Jersey), took actions purportedly aimed at frustrating Hanover Realty’s efforts to obtain all requisite government approvals.  Such actions included: (i) filing an appeal with the New Jersey Department of Environmental Protection (“DEP”) concerning a flood hazard area permit that had been awarded to Hanover Realty, (ii) challenging a wetlands permit already awarded by the DEP to Hanover Realty, (iii) filing an objection with the New Jersey Department of Transportation suggesting that Hanover Realty, on top of making certain improvements to the intersection near the proposed Wegmans, should be compelled to construct an extensive highway overpass near the project, and (iv) commencing a state court lawsuit to nullify a rezoning approval Hanover Realty had obtained from Hanover Township in order to use the property for retail purposes.  These acts, all of which were either largely denied or rejected by the respective administrative or judicial authorities, led Hanover Realty to file a federal lawsuit alleging that the efforts of Village (along with its wholly-owned subsidiary that owns the ShopRite site) were anti-competitive shams designed for no other purpose than to unfairly block its efforts to bring Wegmans to that market space.

After the District Court first dismissed the suit, Hanover Realty appealed and the Third Circuit Court of Appeals reversed in part, holding that Hanover Realty’s injuries were “inextricably intertwined” with the noted anti-competitive conduct, and Hanover Realty thus met the legal standard for asserting a valid antitrust claim.  The Third Circuit found that the end goal of the misconduct was designed to injure Wegmans by keeping them out of the market.  In doing so, Hanover Realty, the party tasked with obtaining all necessary permits and approvals, was targeted by the sham petitions and was forced to unnecessarily incur substantial attorneys’ fees, costs and delays in its development plans.  While the Third Circuit limited its holding to allow Hanover Realty to pursue anti-monopolization claims in the market for full-service supermarkets (and not including the market for full-service supermarket rental space because the parties were not deemed “competitors” in that space), the Court also determined that the wrongful activities triggered the “sham exception” to the Noerr-Pennington doctrine, which ordinarily affords broad immunity from liability to those who petition the government for redress of their grievances.  The Court found that the anti-competitive activities that were intentionally lodged with no purpose other than to thwart Hanover Realty’s development activities with Wegmans were substantial enough to overcome this otherwise widely-applied privilege.

Whether or not Hanover Realty’s claims ultimately prove successful in the lawsuit, the Third Circuit’s ruling carries a meaningful warning for commercial landlords and tenants seeking to block the entry of a competitor in its market space.  Any such efforts must be strategically and tactfully employed with a legitimate purpose, in contrast to the borderline frivolous legal and administrative challenges from Village and ShopRite against Hanover Realty and Wegmans.  Though these types of anti-competition claims are still somewhat of a rare species in the commercial real estate arena, the Hanover Realty decision will certainly provide frustrated developers and landlords with another ace in their sleeve to fight against existing competitors trying to remain the only game in town.

On October 21, 2015, the New Jersey Appellate Division affirmed a trial court ruling that a South Jersey landlord did not violate a coffee-related exclusivity provision in its lease with Starbucks when it subsequently rented space in the same strip mall to McDonald’s – another purveyor of coffee products.

In Delco LLC v. Starbucks Corporation, Delco, the owner-operator of a shopping center in Rio Grande, New Jersey had rented space to Starbucks.  The Starbucks lease contained an exclusivity clause that essentially barred any other tenant at that shopping center from selling coffee, espresso and tea drinks.  However, an exception to this provision was allocated for “any tenant . . . occupying twenty thousand contiguous square feet or more . . . and operating under a single trade name.”  Starbucks’ coffee exclusive at the shopping center became an issue when Delco sought to bring in McDonald’s as a tenant, and Starbucks voiced an objection.  Though there was no question that McDonald’s sells coffee and tea at its fast food restaurants, Delco envisioned leasing 40,000 square feet of contiguous space to McDonald’s – more than twice the size needed to satisfy the exception to the exclusivity provision under the Starbucks lease.  Based upon the clear and unambiguous lease language, the Appellate Division summarily affirmed the trial court’s determination that Starbucks’ objection to the McDonald’s lease lacked any merit, and that Delco was also entitled to attorneys’ fees.

While the Starbucks decision did not establish new law, it is an invaluable reminder for commercial landlords and tenants to carefully negotiate all lease terms, including exclusivity provisions.  Particularly on the tenant side, if a party to a lease is concerned about being “the only game in town” – such as Starbucks being the only tenant selling coffee products at a shopping center – then that party must cautiously negotiate and craft the terms that are ultimately memorialized in the governing lease documents.

An amendment to the Executive Law of New York State modifying the Uniform Fire Prevention and Building Code became effective on June 27, 2015, which now requires owners of existing commercial buildings to install carbon monoxide alarms or detection equipment in every commercial building and restaurant that: (i) contains any carbon monoxide source (including any garage or any other motor-vehicle-related occupancy); and/or (ii) is attached to a garage; and/or (iii) is attached to any other motor-vehicle-related occupancy.  These requirements apply without regard to whether a commercial building is an existing commercial building or a new commercial building and without regard to whether a commercial building has been offered for sale.  Carbon monoxide detection is not required in a commercial building that is: (a) classified, in its entirety, in Storage Group S or Utility and Miscellaneous Group U under chapter 3 of the 2010 Building Code of New York State; (b) occupied only occasionally and only for building or equipment maintenance; and (c) a canopy (as defined in the 2010 Fire Code of New York State).

An “existing commercial building” is a commercial building that was constructed prior to December 31, 2015. A commercial building is deemed to have been constructed prior to December 31, 2015, and deemed to be an existing commercial building, if: (i) the original construction of such commercial building was completed prior to December 31, 2015; or (ii) the complete application for the building permit for the original construction of such commercial building was filed prior to December 31, 2015.  Mixed use buildings are also subject to this new requirement.

Carbon monoxide detection must be provided in each story of a building or “detection zone” in a building in which at least one of three triggering conditions exists, which include the presence of any carbon monoxide source (which include any appliance or equipment that may emit carbon monoxide, such as fuel fired furnaces and boilers; space heaters with pilot lights or open flames; kerosene heaters; wood stoves; fireplaces; and stoves, ovens, dryers, water heaters and refrigerators that use gas or liquid fuel), garages, and other motor vehicle related occupancies.  If a detection zone is not within a “classroom” (which is broadly defined to include a place where classes are taught; or a room that is occupied or capable of being occupied by 6 or more persons (including students and teachers) at any one time), carbon monoxide protection is not required if: (i) such detection zone has ambient conditions that would, under normal conditions and with all required ventilation and exhaust systems installed and operating properly, activate the carbon monoxide detection devices that otherwise would be required in a detection zone, and an alternative safety plan for the building has been approved by the applicable governmental agency; or (ii) such detection zone is open (without sidewalls or drops) on 50% or more of its perimeter, and there is no occupiable area within such detection zone that is not open on at least 50% of its perimeter.

The NY State Fire Prevention and Building Code Council is responsible for developing criteria setting forth the manufacture, design and installation standards for these alarms and detection equipment.

Commercial building owners are being encouraged to install detection equipment in their buildings as quickly as practicable during a “transition period” between the effective date (June 27, 2015) and June 27, 2016.  An owner will not be in violation during this transition period if it can provide to the applicable municipal agency a written statement certifying that the owner is making a good faith attempt to install detection equipment as quickly as practicable.  The detection equipment must be fully installed and operational by the end of the transition period (June 27, 2016).