New York City Commercial Rent Tax - Is Free Rent Free?

“There’s no such thing as a free lunch,” the old adage says. But could there be such a thing as Free Rent? That is the crux of the recent controversy over New York City’s Commercial Rent Tax (CRT). The New York City Department of Taxation and Finance claims that Free Rent is a credit from the landlord, which is subject to CRT. This article explains why a close reading of the law suggests otherwise and suggests that taxpayers dispute audits assessing CRT on Free Rent.

In New York City it is standard practice for leaseholds to include a provision allowing a tenant to occupy its space for free for a negotiated length of time (Free Rent). But, according to the New York City Department of Taxation (the Department), Free Rent is not free at all. It is subject to the 6% New York City Commercial Rent Tax (CRT) and audit assessments are being handed out aggressively. Fortunately for New York City lessees, there is a body of law that says otherwise.

New York City imposes CRT on base rent paid by a tenant when the base rent on a taxable premises exceeds $250,000 on an annual basis. Base rent is rent paid for each taxable premises and a taxable premises is any premises in New York City occupied, used or intended to be occupied or used for the purpose of carrying on or exercising any trade, business or commercial activity. The premises must be located in Manhattan, south of the center line of 96^th Street for the CRT to be applicable.

The Definition of Rent

New York City Administrative Code Sec. 11-701(6) states that rent is the “consideration paid or required to be paid by a tenant for the use or occupancy of a premises, valued in money, whether received in money or otherwise, including all credits and property or services of any kind and including payments required to be made by a tenant on behalf of his or her landlord for real estate taxes, water rents, or charges, sewer rents or any other expenses (including insurance) normally payable by a landlord who owns the realty…”.

The law is clear. Rent is subject to CRT only when it is paid. Rent includes consideration paid or required to be paid and includes credits. When a taxpayer receives Free Rent, rent is not paid, there is no rent credit and, consequently, CRT cannot be assessed.

The Department’s view is that Free Rent is a credit and the CRT applies to an assumed amount of rent for the Free Rent period based on the rent paid during the term of the lease. This is a misapplication of the law because Free Rent is not a credit. Instead, it is a bargained lease provision. A rent credit exists when a landlord owes something to a tenant and in lieu of paying the tenant the landlord allows the tenant to claim a credit against the rent the tenant owes. In that instance CRT would apply to the full amount of the rent credit.

Department’s Position Lacks Legal Authority

The CRT, implemented in 1963, is not a new tax and taxpayers receiving Free Rent is not a new concept. Yet in the tax’s 58 years of existence, there are no published authorities supporting the Department’s actions. To the contrary, the authorities that exist have consistently held that CRT is only due when rent is paid. For example, in The Matter of the Petition of J. Henry Schroder Bank & Trust Company, TAT(H) 93-117, August 31, 1995 (Schroder), the New York City Tax Appeals Tribunal held that the “term base rent includes only consideration actually paid.” In NYC Letter Ruling No. 142-CR-12/88 (the TAT), the Department considered a situation wherein a premises owned by a parent corporation was provided to a subsidiary for free, i.e., no rent was paid. The Department concluded that “if there are no rental payments made or required to be made, and the occupancy by the operating company is gratuitous, there will be no Commercial Rent Tax due in connection with the occupancy.” Finally, in New York City Finance Letter Ruling No. 00-4759, April 27, 2000, a ruling issued by the Department concerning a below market rental payment of $100 per month, the Department concluded that CRT does not apply and “[t]he CRT will apply at such time, if any, that the rent payable by [taxpayer] increases to market rent that is equal to or greater than the amount then subject to CRT.” This ruling is quite telling as there is no discernable difference between a $100 lease payment and a $0 lease payment. Both are clearly below market and both should be treated the same way for CRT purposes. As concluded in the ruling and as should be applied by the Department on audit, CRT does not apply until the rent paid is above the amount subject to CRT.

The Takeaway

The CRT only applies when rent is paid or a landlord provides a rent credit in lieu of a debt owed by the landlord to the tenant. The CRT does not apply to negotiated Free Rent. Taxpayers that are assessed CRT on Free Rent should consider disputing their audit assessments.

Contact an Andersen SALT advisor to learn more about how this development may affect your business.