NYC Cannot Collect Commercial Rent Tax for World Trade Center Airspace

Originally Published on forbes.com on November 27th,2011

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Not long ago I participated in the Forbes 9/11 memorial with two posts one on a heroic Port Authority officer and the other something of apublic service promotion to encourage people to give blood more regularly. Now here I am writing about the World Trade Center because of a recent tax decision by the New York City Tax Appeals Tribunal - In the Matter of One World Trade Center LLC.  It is over a month old but it does not seem to have attracted much attention perhaps because it is a little difficult to understand. Still I think there is an interesting story there.

I think it is fairly probable that the fact that the World Trade Center was leased to private interests just months before the attack is a cooincidence.

The interests that Larry Silverstein represented and presumably formed a part of did not own the World Trade Center but they had  99 year leases on which the ink was barely dry :

Each of the Silverstein Lessees entered into an Agreement of Lease with the Port Authority of New York and New Jersey (the “Port Authority”) dated as of July 16, 2001, having a term of 99 years (individually a “Lease” and collectively the “Leases”). 1 Each Lease related to one of four buildings, respectively known as “One World Trade Center,” “Two World Trade Center,” “Four World Trade Center” and “Five World Trade Center” (the “Buildings”). One World Trade Center and Two World Trade Center also were collectively known as the “Twin Towers.”

 You would think that Osama Bin Laden terminated that lease, but such was not the case:

If the Premises … shall be damaged or destroyed by fire, the elements, the public enemy or other casualty, or by reason of any cause whatsoever and whether partial or total, the Lessee, at its sole cost and expense, ……………. shall remove all debris resulting from such damage or destruction, and shall rebuild, restore, repair and replace the Premises ……

Of course the nature of the tragedy was such that the Silverstein interests could not just go in and rebuild:

Immediately following the September 11, 2001, terrorist attacks, the City took control of the entire WTC Site to conduct activities relating to rescuing any survivors, recovering human remains, cleaning up the debris and shoring up the “bathtub.” 

There were several agreements between Port Authority and the lesseess as to how redevelopment would proceed with the Port Authority ultimately taking ownership of One World Trade Center LLC and leaving other parts of the original footprint to the Silverstein interests.  It is a complicated story and I’m sure it will lead to more litigation for the remainder of the 99 years and maybe beyond.  The important point for this case, though, is that the Silverstein interests, in order to preserve their rights, had to keep paying rent on buildings that were not there anymore.

The Lessee waives any rights now or hereafter conferred upon the Lessee by statute or otherwise to quit or surrender the Premises and terminate this [Lease] or any part thereof, or to any suspension, diminution, abatement or reduction of rent on account of any destruction or damage, except as elsewhere specifically provided herein

It happens that New York City has a Commerical Rent Tax (CRT).  It applies to rents paid for commercial space  south of 96th Street in Manhattan.  In the iconic photos of the New York skyline, which are taken from New Jersey, south is to the right from the viewers point of view – so the World Trade Center was about as far south as you could get.  CRT applies to rents in excess of $250,000 per year.  The Silversteins were paying a lot more than that.  The effective rate of tax is 3.9%.  For 2001 through 2006 the city was looking to collect $35,000,000 including interest and penalites.

An adminstrative law judge (ALJ) ruled that the tax did not apply and the city appealed:

Respondent [i.e. the City] takes exception to the ALJ’s determination that Petitioners’ payments to the Port Authority after September 11, 2001, were not subject to the CRT. Respondent asserts that Petitioners’ rights under the Leases to occupy the Premises at the WTC site and obligations under the Leases to pay rent and rebuild the Buildings continued throughout the Tax Years and, therefore, Petitioners’ payments of rent to the Port Authority were subject to the CRT during the Tax Years. Respondent also takes exception to the ALJ’s cancellation of the Notices contending that the ALJ rejected Petitioners’ arguments for proration of the Initial Rent Payments and for the deduction of business interruption insurance proceeds as subtenant rents in footnote 59 to the ALJ Determination. Respondent asserts, therefore, that based on the calculations submitted by Petitioners , there is still a CRT deficiency owed by Petitioners of $6,420,388 plus interest for the portion of the first Tax Year ending September 10, 2001.

The Silverstein interests had made a large upfront rent payment that was being amortized over the life of the lease for federal income tax purposes and apparently adopted a similar approach for purposes of the CRT.

The City’s argument is that the Silvertstein interests were leasing a “volume of space” that continued to exist:

Throughout the Tax Years Petitioners … leased spaces within real property, as well as the right to replacement buildings located therein…. Absent an effective modification to the Premises under the Leases, reduced to writing and signed by the parties thereto, Petitioners’ rights and obligations persisted regardless of anything they may have been told by the Port Authority, and regardless of any deprivation of access by a non-party to such Leases

It is a little ironic that one of the “non-parties” is the City itself.

The Court did not buy the City’s argument:

After September 11, 2001, the location and nature of the Premises covered by the Leases were thrown into sufficient doubt that we cannot conclude that there were identifiable premises covered by the Leases after that date for purposes of the CRT. We believe the Record amply demonstrates that by July 2002, when control over the WTC Site was returned to the Port Authority, the parties did not expect Petitioners to rebuild the Twin Towers or the other Buildings as originally designed in their original location under Lease section 15.1 even though removal of the Twin Towers Footprints from the definition of “Premises” under the Leases was not reduced to writing until December 2003.

We conclude that the circumstances surrounding the destruction of the Buildings and the inability of the Port Authority and Petitioners to agree during the Tax Years as to how and where replacement Premises would be built require us to conclude that while Petitioners continued to make payments designated as rent under the Leases, there were no identifiable premises covered by the Leases after September 11, 2001, and during the remainder of the Tax Years such that those rent payments could constitute base rent subject to the CRT.

The appeal was not a total waste to the City as it won on the issue of not pro-rating the initial rent payment over the 99 year lease. That and the treatemnt of business interruption insurance was worth over $6,000,000.

As I noted at the beginning, I have seen little coverage of this decision.  The New York Post reporting on the initial decision characterized the City as engaging in a “Ghoulish bid to slap tax on vanished WTC“.  If I could learn how to write good headlines like that, maybe I would be somebody.