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The first three articles in this series (Commercial Leasing Law & Strategy, March, August, and September 2009) examined the issues involved when a tax-exempt organization leases improved property to one or more parties, or develops vacant land for lease or sale to third parties. The primary issues examined in those articles were how to structure the lease payments or the relationship with the developer of the land to avoid having payments to the tax-exempt organization subject to tax for engaging in a business unrelated to the organization’s exempt purpose. In these earlier articles, a basic assumption was that the tax-exempt organization did not carry or incur any debt with respect to the real estate in question.
This article, the last in the series, examines the issues involved when a tax-exempt organization carries or incurs debt with respect to real estate from, or to which, it receives income unrelated to its exempt purposes. This is an important consideration, because the presence of such debt may negate any advantage obtained by the careful structuring of the transactions, as discussed in the earlier articles, with respect to avoiding tax on unrelated business income.
Review of UBIT
As described more fully in the first article in this series, the federal tax code imposes a tax (referred to as the unrelated business income tax, or “UBIT”), computed at the corporate income tax rate, on the unrelated business taxable income (“UBTI”) of most exempt organizations. An unrelated business is any trade or business, the conduct of which is not substantially related to the performance by such organization of the functions that constitute the basis of its exemption from tax. The tax code provides for the categorical exclusion from UBTI of income from certain enumerated sources or arising from certain activities, including all rents from real property, provided that the determination of the amount of such rent does not depend in whole or in part on the net income or profits derived by any person from the property leased.
Debt-Financed Property
The same section of the tax code that excludes rental income from real property from taxable income also provides that this exclusion will be negated in the case of unrelated income from debt-financed property. In addition, gain from the sale of debt-financed property that is not used in connection with the organization’s exempt purposes will also be included in UBTI. It is important to note that income received by an exempt organization on account of debt-financed property will be included in the organization’s UBTI regardless of whether the organization’s activities constitute the regular conduct of a trade or business, unless, and to the extent that, one or more of the available exceptions applies. Property is considered to be debt-financed for this purpose if it is subject to any “acquisition indebtedness.” The term “acquisition indebtedness“ means, with respect to any debt-financed property, the unpaid amount of:
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Sui Generis: Negotiate Like You Mean It
By Lydia Pilch
As further follow-up regarding tracking of the lifecycle of a commercial lease, Part Two of this series addresses various negotiation events, strategies, desired outcomes and potentially low key disasters.
New York’s Guaranty Law Continues to Divide Opinion
By Matthew J. Schenker and Joshua Kopelowitz
This article discusses the recent developments surrounding the constitutionality of New York's Guaranty Law. In particular, we address the Southern District’s view that the statute is unconstitutional and the splintered view of the statute’s constitutionality expressed by New York State courts.
Don’t Get Caught Holding a Conditional Loan Approval at Closing
By Matthew Kramer
With rising interest rates and more stringent lending standards for both residential and commercial properties, security deposit disputes caused by buyers’ inability to satisfy pre-closing purchase-financing conditions are also increasing.
New York’s Seldom Used Expedited Money Judgment Mechanism: CPLR 3213
By Massimo F. D’Angelo and Gregory Wong
In New York state and local court cases, there is a seldom-used procedural mechanism for obtaining an expedited money judgment against a guarantor. This article provides an overview of CPLR 3213 motions, an update on the resolution of the split that previously existed between the New York State Supreme Court, Appellate Division, First and Second Departments, and practical guidance for transactional counsel drafting commercial leases and guaranties.
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