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Volume 3 - Opinions of Counsel SBEA No. 23

Opinions of Counsel index

School districts exemption (BOCES) (lease and transfer of title) - Real Property Tax Law, § 408:

A transaction entered into by BOCES with a private contractor to construct educational facilities must be in compliance with section 1958 of the Education Law and section 103 of the General Municipal Law. The local assessor should make a determination as to the taxable or exempt status of the property and leave legal clarification of the issue of compliance with the above laws to the parties involved.

Our opinion has been requested concerning the taxable status of certain real property which BOCES Supervisory District #1 of Monroe County (hereafter referred to as “BOCES”) proposes to construct.

Briefly stated, the essential facts are that BOCES is faced with a space problem which may necessitate additional classroom facilities for future BOCES programs and activities. The property which BOCES now occupies is owned by a private individual and leased to BOCES. The owner has offered to construct the necessary additional facilities and to deed the property to BOCES. However, thereafter, BOCES would lease the property back to the former owner and he in turn would lease the property to BOCES. The total rental payments would be sufficient to permit the former owner to recoup his capital costs, and, upon termination of the lease, BOCES would own the subject premises.

Despite the fact that the essential papers (e.g., the deed, the lease and the sublease) are not available, we believe that certain conclusions can be drawn from the arrangement as described above.

First, if the deed to the BOCES is absolute, then title will remain in the BOCES regardless of subsequent events. In such case BOCES is the owner of the real property, and the real property is entitled to exemption pursuant to section 408 of the Real Property Tax Law.

Second, if the deed, although absolute on its face, is given upon condition of payment of the capital costs of construction, then it is entirely possible that the transaction can be termed an equitable mortgage (Zivitosky v. Max, 190 Misc. 1044, 75 N.Y.S.2d 553, aff’d, 276 App. Div. 792, 92 N.Y.S.2d 631). Thus, the deed to BOCES may also be security for the construction loan, and failure on the part of BOCES or the private owner to repay such loan may vest title in the lender. However, the nature of the equitable mortgage is such that record title would be in BOCES, and the assessor would have no knowledge of such mortgage absent the decision of a court. Therefore, in this situation BOCES would be considered the owner of the real property.

Third, if the transfer of title is specifically conditioned upon the terms and conditions of the lease, namely, that absolute title will not pass until the capital costs have been repaid in the form of rent, then it would seem that the transaction can be termed an installment contract of sale. Generally, although the title technically remains in the grantor until completion of the lease, it is clear and well established law that the contract vendee in possession is considered to be the owner for purposes of real property taxation (People ex rel. Donner-Union Coke Corp. v. Burke, 204 App. Div. 577, 198 N.Y.S. 601, aff’d, 236 N.Y. 650, 142 N.E. 320; Wilson and Co. v. City of New York, 73 N.Y.S.2d 206, aff’d, 276 App. Div. 755, 92 N.Y.S.2d 918, mot. lv. to app. denied, 276 App. Div.2d 894, 94 N.Y.S.2d 198, mot. lv. to app. denied, 301 N.Y. 817).

Our analysis of the law in this area, specifically, the case of Board of Cooperative Educational Service, etc., Nassau County v. Goldin (38 App. Div.2d 267, 328 N.Y.S.2d 958), is that if this transaction is, in fact, a purchase arrangement (i.e., equitable mortgage or installment sale), then, in the absence of compliance with section 1958 of the Education Law and section 103 of the General Municipal Law, the transaction is illegal unless the State Legislature provides specific authorization for the same.

Therefore, although our opinion to an assessor would be substantially as stated herein, we would not advise the assessor that he bears responsibility for challenging this type of arrangement. If in his judgment the arrangement is illegal, he may place the property on the taxable portion of the roll and BOCES will have its remedy in a proceeding pursuant to Article 7 of the Real Property Tax Law; if he determines that the property is exempt because of ownership by BOCES, then any property owner who believes the arrangement is illegal may commence a proceeding pursuant to Article 78 of the Civil Practice Law and Rules to void the exemption.

June 6, 1973