Contract analysis

I. EXECUTIVE SUMMARY This memorandum analyzes the federal, state, and local tax implications of the proposed dual–special purpose entity ("SPE") financing structure for the Hudson Yards West mixed-use transit-oriented development located at 450 West 34th Street, New York, New York 10001 (Block 729, Lots 1, 5, 12, and 15) (the "Project"). The total estimated Project cost is approximately $920,000,000, to be financed t

II. BACKGROUND AND TRANSACTION OVERVIEW A. Metropolitan Transit Development Corp. — Entity Profile Metropolitan Transit Development Corp. ("MTDC") is an Illinois government instrumentality created by an act of the Illinois General Assembly, codified at 70 ILCS 3615/1.01 et seq. (the "Enabling Act"). MTDC was established for the purpose of promoting, developing, and managing transit-oriented development projects in fu

III. FEDERAL TAX ANALYSIS A. MTDC's Status as a Government Instrumentality — Section 115 and Related Authority The threshold federal tax question in this transaction is whether MTDC qualifies for the income exclusion provided by Section 115(1) of the Code, and whether that exclusion is preserved when income is earned through the two disregarded-entity SPEs.

Section 115(1) of the Code provides that gross income does not include "income derived from any public utility or the exercise of any essential governmental function and accruing to a State or any political subdivision thereof, or the District of Columbia." The purpose of Section 115 is to ensure that the federal government does not tax the income of state and local governmental entities, consistent with the principl

Section 511(a)(2)(B) of the Code provides that the UBTI tax applies to "any college or university which is an agency or instrumentality of any government or any political subdivision thereof, or which is owned or operated by a government or any political subdivision thereof, or by any agency or instrumentality of one or more governments or political subdivisions." This provision is narrowly targeted at governmental c

IV. FEDERAL TAX TREATMENT OF THE GROUND LEASE A. Characterization of the Ground Lease As described in Section II.B above, MTDC holds a leasehold interest in the Project site under the Ground Lease executed on June 1, 2020, with NYCEDC as fee owner and ground lessor. The Ground Lease has an initial term of 99 years, with no renewal options beyond the initial term. MTDC pays annual ground rent of $4,200,000, subject to

V. NEW YORK STATE AND CITY TAX CONSIDERATIONS A. New York State Tax Treatment of MTDC and the SPEs

1. Corporate Franchise Tax (Article 9-A). New York State imposes a corporate franchise tax under Article 9-A of the Tax Law on corporations and certain other entities that are "doing business, employing capital, owning or leasing property, or maintaining an office" in New York. Tax Law § 209.1. The tax is imposed on the greater of several alternative bases, including a tax on business income (allocated to New York),

2. LLC Filing Fee — Tax Law § 658(c). Notwithstanding the disregarded-entity classification for income tax purposes, New York State imposes an annual filing fee on limited liability companies and disregarded entities that have New York-source gross income. Tax Law § 658(c). This filing fee applies regardless of whether the LLC is subject to the franchise tax or income tax — it is a separate fee based on the LLC's New

3. Real Property Gains Tax (Article 31-B). For completeness, we note that New York formerly imposed a real property gains tax under Article 31-B of the Tax Law on certain transfers of real property with consideration exceeding $1,000,000. This tax was repealed effective for transfers occurring on or after June 15, 1996. The real property gains tax is therefore not applicable to the transactions contemplated in connec

1. General Corporation Tax / Unincorporated Business Tax. General Corporation Tax. New York City imposes a general corporation tax ("GCT") under Title 11, Chapter 6 of the New York City Administrative Code on corporations that are "doing business, employing capital, owning or leasing property in a corporate or organized capacity, or maintaining an office" in New York City. Admin. Code § 11-603. As a government instru

2. Commercial Rent Tax (CRT). New York City imposes a commercial rent tax ("CRT") on tenants of commercial premises located in Manhattan south of 96th Street (the "CRT zone") whose annual commercial rent exceeds the applicable threshold, which is currently $250,000. Admin. Code § 11-701 et seq. The CRT is imposed on the tenant (not the landlord) and is calculated as a percentage of the tenant's "base rent" (total ren

3. Real Property Tax Considerations. Real property tax is one of the most significant fiscal considerations for the Project, and the resolution of the real property tax question will have a material impact on the Project's economics. The Project site is on land owned in fee by NYCEDC, an instrumentality of the City of New York. Under Section 412 of the Real Property Tax Law ("RPTL"), property owned by a municipal cor