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Volume 1 - Opinions of Counsel SBEA No. 23

Opinions of Counsel index

Industrial development agencies (scope of exemption) - Real Property Tax Law, § 412-a; General Municipal Law, § 874:

The exemption provided by the Real Property Tax Law, section 412-a, and the General Municipal Law, section 874, applies only to general taxes and not to special assessments and special ad valorem levies.

The Town of Wallkill Industrial Development Agency (hereafter called the Agency) leases its property to the Strick Corporation under a lease agreement which provides, in part:

“SECTION 6.3. Taxes, Other Governmental Charges and Utility Charges.

“The Agency and the Lessee acknowledge that under present law the income and profits (if any) of the Agency from the Facility are not subject to either Federal or New York income taxation, and that this factor, among others, has induced the Lessee to enter into this Lease Agreement. However, the Lessee will pay, as the same respectively become due, (i) all taxes and governmental charges of any kind whatsoever, including ad valorem taxes and any taxes on leasehold interests, that may at any time be assessed or levied against or with respect to the Facility and any machinery, equipment or other property installed or brought by the Lessee therein or thereon . . . and (iii) all assessments and charges lawfully made by any governmental body for public improvements that may become secured by a lien en the Facility; provided, that with respect to special assessments or other governmental charges that may lawfully be paid in installments over a period of years, the Lessee shall be obligated to pay only such installments as are required to be paid during the Lease Term.
”. . .The Lessee may at its expense and in its own name and behalf or in the name and behalf of the Agency apply for any tax exemption allowed by the State of New York or any political or taxing subdivision thereof under any existing or future provisions of law which grants or may grant such tax exemptions.”

          A question has been raised as to what effect, if any, this agreement has on the levy and collection of general taxes, special assessments and special ad valorem levies, and, in addition, whether the value of this property may be entered on the assessment roll for purposes of tax and debt limitations.

One of the foremost principles of assessment law is that all real property is subject to taxation unless it is specifically exempted therefrom (section 300, Real Property Tax Law). A lease agreement cannot create an exemption from taxation even when one of the parties to the agreement is the taxing unit or an agency thereof (N.Y.S. Constitution, Art. XVI, sec. 1; Roosevelt Raceway, Inc. v. Monaghan, 9 N.Y.2d 293, 213 N.Y.S.2d 729, 174 N.E.2d 71, cert. den. 368 U.S. 12, 82 S.Ct. 123). Tax exemptions may be granted only by the State Legislature. And likewise, parties may not agree (by lease or otherwise) that the assessor should enter legally tax exempted property on the assessment roll and that the owner of such property will pay the taxes thereby levied.

As to the taxable status of the real property owned by an industrial development agency, section 412-a of the Real Property Tax Law provides that such property shall be entitled to exemption as may be provided in the General Municipal Law. Article 18A of the General Municipal Law is the statutory framework for industrial development agencies, and section 874 provides tax exemptions as follows:

“(1 ) It is hereby determined that the creation of the agency and the carrying out of its corporate purposes is in all respects for the benefit of the people of the state of New York and is a public purpose, and the agency shall be regarded as performing a governmental function in the exercise of the powers conferred upon it by this title and shall be required to pay no taxes or assessments upon any of the property acquired by it or under its jurisdiction or control or supervision or upon its activities.

“(2) Any bonds or notes issued pursuant to this title, together with the income therefrom, as well as the property of the agency, shall be exempt from taxation, except for transfer and estate taxes.”

Even a cursory examination of this section yields the conclusion that the Legislature has declared that the property of industrial development agencies shall to some extent be exempt from taxation. The critical question is what types of charges (i.e., general taxes, special assessments, or special ad valorem levies) are included within the scope of section 874, and a resolution of that question requires a brief discussion and examination of the type of organization which Article 18A has created.

We are, in fact, dealing with a quasi-public body which is conceived, created and operated for the purpose of providing some form of service or activity which will be of benefit to the general public. The body is organized and funded outside of the strict framework of the formal government of the state or municipality primarily in order to avoid increasing the financial obligations of the government involved. The foundation of this relatively new concept of quasi-public activity is the financial self-sufficiency which the body is intended to maintain. And the cornerstone of this financial self-sufficiency is the agreement by the State Legislature, in the form of a statutory direction, that the body will not be subject to general taxes such as the income and property taxes (section 874(1)). The elimination of these significant expenses, plus the elimination of the possibility of loss of property due to tax sales, is considered to be a major incentive in the purchase of bonds for the financing of the body.

This brings us again to section 874 of the General Municipal Law, the exemption statute for the industrial development agencies in New York State. The simple wording of the statute recites at once that “the agency . . . shall be required to pay no taxes or assessments upon any of the property acquired by it” (subdivision 1) and that “any . . . property of the agency shall be exempt from taxation” (subdivision 2). If the phrase in subdivision 1 were deemed as controlling, then the agency would be exempt from general taxes, special assessments and possibly special ad valorem levies (see Matter of City of New York, 192 N.Y. 459, 85 N.E. 755; In re White Plains Presbyterian Church, 112 App. Div. 130, 98 N.Y.S. 63; N.Y. Telephone Co. v. Common Council and Assessors of Rye, 43 Misc.2d 668, 252 N.Y.S.2d 126). However, the phrasing in subdivision 2, namely that the property of the Agency “shall be exempt from taxation”, is more limited in its scope since a simple exemption from taxation includes only general taxes and not special assessments and special ad valorem levies (Roosevelt Hospital v. Mayor of New York, 84 N.Y. 108; County of Westchester v. Town of Harrison, 201 Misc. 211, 114 N.Y.S.2d 492; Dinn v. Board of Education of UFSD No. 4, Town of North Hempstead, 121 Misc. 633, 202 N.Y.S. 62).

Since tax exemption statutes must be strictly construed (Lawrence-Smith School, Inc. v. City of New York, 208 N.Y. 805, 21 N.E.2d 693) and since the direction of subdivision 2 follows and therefore controls what has preceded it, the phrase “shall be exempt from taxation” is the direction of the statute, and the exemption authorized by section 874 applies only to general taxes and not to special assessments and special ad valorem levies.

The conclusion as to the limited scope of section 874 is further supported by comparing that section to analogous sections in the statutory frameworks of similar quasi-public bodies. The primary statutory receptacle for the statutes creating and governing these bodies is the Public Authorities Law (Volume 42, McKinney’s Consolidated Laws of New York, Annotated) and an examination of these laws demonstrates that the exemption statutes for the public authorities of the State vary significantly in their scope according to the manner in which they are written.

Several of the authorities provide for exemptions only in regard to interest on the bonds used in financing the authority (e.g., the Historic Rome Development Authority, section 916, State of New York Mortgage Agency Act, section 2413). Several other authorities are exempt from general taxes only, in that their particular exemption statutes use the phrase “exempt from taxation” (e.g., New York State Thruway Authority, sections 371-372, Central New York Regional Market Authority, section 833). And, there are many statutes creating authorities which use the same language as is present in section 874 of the General Municipal Law (e.g., Erie County Water Authority, sections 1063-1064, Onondaga Solid Waste Disposal Authority, sections 2027 and 2028, Thousand Islands Bridge Authority, section 585).

While the above examples show the conscious differentiation in wording and scope of the exemption statutes for the several authorities examined, an even more significant circumstance exists with several of the most recent authorities. That circumstance is that the tax exemption section in the governing law specifically enumerates the various forms of charges and the liability or lack thereof to which the real property of the authority is subject. For example, the New York State Clear Waters Authority, as enacted by Article 5, Title 12 of the Public Authorities Law is exempt from taxation pursuant to section 1296:

“Real property owned by the authority shall be exempt from taxation, special ad valorem levies and special assessments.”

This form of exemption statute is also present in the Titles which create the Capitol District Transportation Authority, section 1316, the Central New York Regional Transportation Authority, section 1341, the Metropolitan Transportation Authority, sections 1266 and 1275, and the Rochester-Genesee Regional Transportation Authority, section 1299qq.

In addition to the analogous statutes present in the Public Authorities Law, there is also evidence in other laws that the precise scope of an exemption is delineated according to the descriptive words used in the exemption statutes. Thus, the Court of Appeals has held that an exemption statute which directs that real property is exempt from “public taxes and assessments” is applicable only to general taxes levied against the entire tax district, and the real property in question was liable for special assessments levied for local improvements to that property (Buffalo City Cemetery v. City of Buffalo, 46 N.Y. 506). And finally, section 19 of the Public Lands Law, first enacted in 1894, uses the phrase “taxes and assessments for local improvements”, thereby specifically including special assessments in addition to general taxes.

Thus, it seems clear that the use of the phrase “exempt from taxation” in section 874, subdivision 2, is a direction that the property of the industrial development agency should be exempt from general taxes only and that it should not be exempt from special assessments and special ad valorem levies.

As to the legality of entering the value of the real property of the industrial development agency on the assessment roll, since such property is exempt from general taxation, any such entry would be an illegal assessment and since the exemption statute does not require any formal application for exemption, it would be most inadvisable to enter the property on the taxable portion of the assessment roll. Beside the fact that the lease agreement cannot in any way alter the exempt status of the organization, the agreement provides only that the lessee will pay taxes which are lawfully levied and assessed against the property, and any general taxes levied against such property would clearly be unlawful.

March 2, 1971