1031-00004 · Hudson Yards West Mortgage LLC · Closing Opinions

tax-exempt-status-opinion.docx DOCUMENT Real Estate

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CALDERWOOD & HARKNESS LLP One Liberty Plaza, 55th Floor New York, NY 10006

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT

MEMORANDUM

TO: Douglas Fairchild, Partner, Real Estate Angela Fontaine, Partner, Real Estate Grace Nakamura, Senior Associate, Real Estate

FROM: Sylvia Hartwell, Partner, Tax

DATE: April 29, 2025

RE: Tax-Exempt Status of Metropolitan Transit Development Corp. — Implications for Hudson Yards West Financing Matter No. 1031-00004

I. Executive Summary

This memorandum addresses three principal tax questions that have arisen in connection with the proposed construction financing of the Hudson Yards West project (the "Project") at 450 West 34th Street, New York, New York 10001. The borrowing entities are Hudson Yards West Mortgage LLC ("HYW Mortgage LLC") and Hudson Yards West Mezzanine LLC ("HYW Mezzanine LLC"), each a Delaware limited liability company ultimately owned by the Metropolitan Transit Development Corporation ("MTDC"), an Illinois government instrumentality. The senior mortgage loan of $475,000,000 (the "Senior Mortgage Loan") is being provided by Ironclad Capital Partners, with participation from Ridgeline Credit Solutions, Atlas Mutual Assurance, Commonwealth Trust Company, Harborview Capital Group, and Meridian Pacific Lending. The mezzanine loan of $200,000,000 (the "Mezzanine Loan") is being provided by Granite Peak Capital Management.

The three principal questions addressed herein are:

(a) whether interest on the Senior Mortgage Loan and the Mezzanine Loan is exempt from federal income tax under Internal Revenue Code ("IRC") § 103 or any other applicable provision;

(b) whether the Senior Mortgage Loan and/or the Mezzanine Loan qualify for an exemption from New York State and New York City mortgage recording tax ("MRT") under New York Tax Law § 252 or any related provision; and

(c) whether the Project qualifies for a real property tax exemption under the New York Real Property Tax Law ("RPTL") § 404, § 412-a, or an alternative Payment in Lieu of Taxes ("PILOT") structure, and the implications of the applicable tax treatment for the loan underwriting and financial covenants.

Our bottom-line conclusions, each of which is discussed at length in the sections that follow, are as follows:

Government Instrumentality Status. MTDC is a government instrumentality of the State of Illinois for purposes of federal, New York State, and New York City tax law. However, the Borrower SPEs — HYW Mortgage LLC and HYW Mezzanine LLC — are Delaware limited liability companies that are not themselves government instrumentalities. Tax-exempt status does not automatically flow through to these SPEs absent specific statutory provisions or a viable agency theory, and the single-purpose entity requirements imposed by the lenders may undercut such an agency theory.

Federal Income Tax Treatment of Loan Interest. Interest on the Senior Mortgage Loan and the Mezzanine Loan is not tax-exempt interest for federal income tax purposes. The loans are not "obligations" of a state or political subdivision within the meaning of IRC § 103. Even if the loans were restructured so that MTDC were the direct borrower, bank loans to government instrumentalities do not qualify as tax-exempt obligations under IRC § 103 unless they are issued in registered form and satisfy the requirements of IRC § 149, among other conditions, including private activity bond limitations that would likely apply given the commercial components of the Project. Lenders — Ironclad, Granite Peak, and all participants — should not expect tax-exempt treatment of interest income.

Mortgage Recording Tax. The MRT exemption under New York Tax Law § 252 is potentially available with respect to the Senior Mortgage Loan if the mortgage is structured so that MTDC is the direct mortgagor, or if certain conditions are met to support the argument that HYW Mortgage LLC is acting as the agent or alter ego of MTDC. If the exemption is not available, the potential MRT liability on the Senior Mortgage Loan of $475,000,000 is approximately $13,300,000, a material closing cost that would need to be allocated between the parties. The Mezzanine Loan, which is secured by a pledge of membership interests rather than a mortgage on real property, is generally not subject to MRT. We recommend careful structuring and consultation with Clearfield & Associates (Harrison Whitmore) regarding Ironclad's willingness to accept a modified mortgagor structure.

Real Property Tax. A full exemption from real property tax under RPTL § 404 or § 412-a is unlikely for the entirety of the Project given its mixed-use character, which includes substantial commercial and office components. However, because the Project is located on land owned by the City of New York (through NYCEDC) and leased to MTDC pursuant to a ground lease, a PILOT structure is the expected and most likely outcome. The terms of the PILOT will have a significant impact on projected net operating income ("NOI"), the combined debt service coverage ratio ("DSCR") covenant of 1.20x, the debt yield covenant of 8.0%, and the loan-to-value ("LTV") covenant of 70.0%. PILOT negotiation with NYCEDC is a critical path item for the financing.

The balance of this memorandum sets forth the detailed analysis supporting these conclusions, together with specific recommendations for structuring, diligence, and coordination among the deal team.

II. Scope of Analysis and Assumptions

A. Documents Reviewed

In preparing this memorandum, we have reviewed the following documents and materials:

1. MTDC Enabling Statute: 70 ILCS 3615/1.01 et seq. (Illinois Regional Transportation Authority Act, as amended), together with the specific provisions of 70 ILCS 3620/1 et seq. (Metropolitan Transit Development Corporation Act), which created MTDC as an independent government instrumentality of the State of Illinois.

2. MTDC Charter and Bylaws, as amended through January 15, 2024, certified by Lydia Okafor, General Counsel of MTDC.

3. Ground Lease between New York City Economic Development Corporation ("NYCEDC"), as landlord, and Metropolitan Transit Development Corporation, as tenant, dated as of June 1, 2020, recorded in the Office of the City Register of the City of New York on June 12, 2020, at CRFN 2020000198762 (the "Ground Lease").

4. Senior Mortgage Loan Term Sheet dated February 28, 2025, between Ironclad Capital Partners ("Ironclad") and HYW Mortgage LLC, setting forth the principal terms of the Senior Mortgage Loan in the amount of $475,000,000 at a rate of Term SOFR + 425 basis points (SOFR floor of 1.00%).

5. Mezzanine Loan Term Sheet dated March 7, 2025, between Granite Peak Capital Management ("Granite Peak") and HYW Mezzanine LLC, setting forth the principal terms of the Mezzanine Loan in the amount of $200,000,000 at a fixed rate of 11.50%.

6. Draft Organizational Documents for HYW Mortgage LLC and HYW Mezzanine LLC, including Certificates of Formation, Limited Liability Company Agreements, and related resolutions, provided by Grace Nakamura on March 22, 2025.

7. Uniform Land Use Review Procedure ("ULURP") Approval: Application No. C 230415 ZSM, City Planning Commission approval dated September 12, 2023, and City Council approval dated October 25, 2023.

8. Whitfield Albrecht LLP Audited Financial Statements for MTDC, for the fiscal year ended December 31, 2024 ("FY2024 Financial Statements"), including notes to financial statements and auditor's report (unqualified opinion).

9. Pinnacle Ratings Group Credit Rating Report, Report No. PRG-MTDC-A-2024-1187, dated November 8, 2024, assigning MTDC a long-term issuer credit rating of A– with stable outlook.

10. Broadstreet Appraisal Group Appraisal Report No. BAG-25-1092, dated April 1, 2025, prepared by Marcus Tolliver, MAI, concluding to an as-stabilized appraised value of the Project of $1,025,000,000 (the "Broadstreet Appraisal").

11. Various internal working drafts of the Senior Mortgage Loan Agreement, Mezzanine Loan Agreement, Mortgage, Security Agreement, and related ancillary documents, as provided by our Real Estate group.

B. Factual Assumptions

We have assumed the following facts for purposes of this analysis. We have not independently verified these facts and have relied on the representations of MTDC, its advisors, and the documents listed above.

• Total Project Cost: $920,000,000, consisting of hard construction costs, soft costs, financing costs, and reserves.

• Capital Stack:

• Project Site: Block 729, Lots 1, 5, 12, and 15, in the Borough of Manhattan, City of New York, commonly known as 450 West 34th Street, New York, New York 10001.

• Project Description: The Project is a mixed-use development consisting of approximately 1.2 million square feet of commercial office space, approximately 85,000 square feet of ground-floor and below-grade retail space, and approximately 45,000 square feet of public transit infrastructure improvements, including a below-grade connection to the No. 7 subway line extension at the 34th Street–Hudson Yards station and improvements to bus transit facilities along 34th Street.

• Projected Stabilized NOI: $58,200,000 per year, as set forth in the Borrower's operating projections and underwritten by Ironclad and Granite Peak.

• As-Stabilized Appraised Value: $1,025,000,000, per the Broadstreet Appraisal (Report No. BAG-25-1092, dated April 1, 2025).

• Target Closing Date: June 15, 2025.

C. Structural Assumptions

The current proposed transaction structure is as follows:

• HYW Mortgage LLC, a Delaware limited liability company, is the borrower under the Senior Mortgage Loan and the holder of the leasehold interest in the Project site under the Ground Lease (or an assignment thereof). HYW Mortgage LLC will grant a leasehold mortgage on the Project to Ironclad as security for the Senior Mortgage Loan.

• HYW Mezzanine LLC, a Delaware limited liability company, is the borrower under the Mezzanine Loan. HYW Mezzanine LLC holds 100% of the membership interests in HYW Mortgage LLC. The Mezzanine Loan is secured by a first-priority pledge of HYW Mezzanine LLC's membership interests in HYW Mortgage LLC.

• Both HYW Mortgage LLC and HYW Mezzanine LLC are wholly owned, directly or indirectly, by MTDC. Specifically, MTDC holds 100% of the membership interests in HYW Mezzanine LLC, which in turn holds 100% of the membership interests in HYW Mortgage LLC.

• Both SPEs are organized as single-purpose entities under Delaware law, with separateness covenants, independent directors (or independent managers), and non-consolidation opinion requirements imposed by the lenders. These structural features are standard in commercial real estate finance transactions and are required by both Ironclad and Granite Peak.

D. Governing Law Assumptions

• New York law governs the loan documents, the Ground Lease, and the mortgage and security instruments.

• Illinois law governs MTDC's existence, powers, and authority to enter into the transactions contemplated by the loan documents.

• Federal tax law (the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder) applies to the federal income tax questions presented.

• New York State and New York City tax law, including the New York Tax Law, the New York Real Property Tax Law, and the New York City Administrative Code, apply to the state and local tax questions presented.

III. Analysis of MTDC's Government Instrumentality Status

The threshold question in this analysis is whether MTDC qualifies as a government instrumentality for tax purposes. This determination is relevant to each of the specific tax questions addressed below and must be analyzed under federal, Illinois, and New York law.

A. Illinois Law — Enabling Legislation and Characteristics

MTDC was created pursuant to the Metropolitan Transit Development Corporation Act, 70 ILCS 3620/1 et seq. (the "Enabling Act"), enacted by the Illinois General Assembly in 1983 and amended on multiple occasions thereafter. The Enabling Act declares MTDC to be "a body politic and corporate, and an instrumentality of the State of Illinois," created for the purpose of promoting, developing, constructing, and operating transit-oriented development projects in the State of Illinois and in other jurisdictions where such development serves the public transit interests of the State. MTDC is authorized to act in furtherance of an essential governmental function — namely, the development and improvement of public transit infrastructure and transit-oriented real estate to support the growth and efficiency of public transportation systems.

The following characteristics of MTDC are indicative of its status as a government instrumentality under Illinois law:

Legislative Creation. MTDC was created by an affirmative act of the Illinois General Assembly, not by private incorporation under the Illinois Business Corporation Act or any general-purpose entity statute. The Enabling Act sets forth MTDC's purposes, powers, governance structure, and relationship to the State of Illinois in specific detail.

Essential Governmental Function. MTDC's statutory purpose — the development, construction, and operation of transit-oriented development projects — is an essential governmental function. Public transit development has long been recognized as a core governmental responsibility, and MTDC's activities are directly connected to the provision and improvement of public transit infrastructure.

Government-Appointed Governing Body. MTDC is governed by a Board of Directors consisting of eleven members, a majority of whom are appointed by the Governor of Illinois with the advice and consent of the Illinois Senate. The Chair of the Board, Margaret Kowalski, was appointed by Governor Pritzker and confirmed by the Senate in 2021. Three additional directors are appointed by the Mayor of Chicago, and two are appointed by the President of the Cook County Board. This governance structure ensures that MTDC is subject to governmental control and oversight.

Eminent Domain Power. Under Section 15 of the Enabling Act, MTDC is authorized to exercise the power of eminent domain within the State of Illinois for the purpose of acquiring property necessary to carry out its statutory functions. The delegation of sovereign power is among the most significant indicators of instrumentality status under both federal and state law.

Open Government Requirements. MTDC is subject to the Illinois Open Meetings Act (5 ILCS 120/1 et seq.) and the Illinois Freedom of Information Act (5 ILCS 140/1 et seq.), confirming its status as a governmental entity subject to public accountability and transparency requirements.

Scale of Operations. MTDC's FY2024 audited financial statements, prepared by Whitfield Albrecht LLP, reflect total operating revenue of $1,120,000,000 and net assets of $3,700,000,000. MTDC maintains a real estate portfolio valued at approximately $4,800,000,000 across eleven states, including properties that integrate transit infrastructure with commercial, residential, and mixed-use development. These figures reflect public-scale operations consistent with a major government instrumentality.

Credit Quality. Pinnacle Ratings Group has assigned MTDC a long-term issuer credit rating of A– with a stable outlook (Report No. PRG-MTDC-A-2024-1187, dated November 8, 2024). The Pinnacle report notes that MTDC's creditworthiness is supported by its governmental status, diversified revenue base, and strong relationship with the State of Illinois and its political subdivisions.

Senior Management. MTDC's organizational structure is consistent with that of a government instrumentality. David Harrington serves as Executive Director (chief executive officer), Priya Subramanian serves as Chief Financial Officer, and Lydia Okafor serves as General Counsel. Each of these officers was appointed by the Board of Directors and serves at the pleasure of the Board.

Based on the foregoing, we conclude that MTDC is a government instrumentality of the State of Illinois as a matter of Illinois law. This conclusion is supported by the explicit language of the Enabling Act, the characteristics of MTDC's governance and operations, and the delegation of sovereign powers to MTDC by the Illinois General Assembly.

B. Federal Tax Classification — IRC § 115 and Revenue Ruling Analysis

For federal income tax purposes, the classification of an entity as a government instrumentality determines, among other things, whether the entity's income is excluded from gross income under IRC § 115 and whether obligations issued by the entity may qualify for tax-exempt treatment under IRC § 103.

IRC § 115. Section 115(1) of the Internal Revenue Code provides that gross income does not include income derived from the exercise of any essential governmental function and accruing to a state or any political subdivision thereof. This exclusion applies to instrumentalities of states and political subdivisions to the extent they are performing essential governmental functions. The scope of § 115 is not limited to the states themselves but extends to entities that are integral parts of or are controlled by state and local governments.

Treasury Regulations and IRS Guidance. Treasury Regulation § 1.103-1(b) provides that the term "political subdivision" denotes any division of any state or local governmental unit which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of the unit. While this regulation was promulgated in connection with § 103 (pertaining to tax-exempt bonds), the IRS has applied similar principles in determining instrumentality status for purposes of § 115. The IRS has applied a multi-factor test, derived from a series of revenue rulings and private letter rulings, to determine whether an entity qualifies as an instrumentality of a state or political subdivision. The factors most commonly considered include:

1. Delegation of Sovereign Power. Whether the entity has been delegated the right to exercise one or more sovereign powers, such as the power of eminent domain, the police power, or the power to tax. MTDC has been delegated the power of eminent domain under Section 15 of the Enabling Act.

2. Government Control. Whether the entity is subject to control or supervision by a governmental unit. MTDC's Board of Directors is composed predominantly of gubernatorial and mayoral appointees, and MTDC is subject to the Illinois Open Meetings Act and FOIA.

3. Government Financial Interest. Whether the state or political subdivision has a financial interest in the entity, including the right to receive assets upon dissolution. Under Section 25 of the Enabling Act, upon dissolution of MTDC, all remaining assets revert to the State of Illinois.

4. Government-Appointed Governing Body. Whether the entity's governing body is appointed by governmental officials. As discussed above, a majority of MTDC's Board members are appointed by the Governor, with additional members appointed by the Mayor of Chicago and the President of the Cook County Board.

5. Tax-Exempt Purpose. Whether the entity was created to serve a public or governmental purpose. MTDC was created for the express purpose of promoting and developing transit-oriented projects in the public interest.

6. Designation as Instrumentality. Whether the entity is designated as an instrumentality of the state by its enabling legislation. The Enabling Act expressly designates MTDC as "an instrumentality of the State of Illinois."

Applying these factors, we conclude that MTDC satisfies each of the criteria for classification as a government instrumentality of the State of Illinois for federal tax purposes. MTDC's income from the exercise of essential governmental functions is excluded from gross income under IRC § 115(1), and MTDC itself is not subject to federal income tax on such income.

We note, however, that the question of whether any particular activity of MTDC constitutes an "essential governmental function" is a facts-and-circumstances determination. As discussed in Section VIII below, the commercial real estate development activities at Hudson Yards West may raise questions as to whether the income derived therefrom is exempt under § 115, particularly to the extent that the Project includes substantial commercial office and retail components.

C. New York Law — Recognition of Out-of-State Government Instrumentalities

For purposes of the New York State and New York City tax questions addressed in this memorandum — including MRT, real property tax, RETT, RPTT, and UBT — it is necessary to determine whether MTDC's status as an Illinois government instrumentality is recognized under New York law.

Comity Principles. New York courts and administrative authorities have generally recognized the governmental status of entities created by other states, applying principles of interstate comity. The New York Court of Appeals has held that an entity created by another state as a government instrumentality is entitled to be treated as such in New York, absent a specific New York statute to the contrary. See, e.g., Port Auth. Trans-Hudson Corp. v. Feeney, 495 U.S. 299 (1990) (discussing interstate comity for government entities); Agway, Inc. v. Williams, 68 N.Y.2d 113 (1986) (applying comity principles in tax context). The New York Department of Taxation and Finance ("DTF") has issued advisory opinions recognizing the tax-exempt status of out-of-state government instrumentalities for various purposes, including MRT and RETT exemptions.

Distinction Between MTDC and Its SPEs. It is critical to distinguish between MTDC itself — which is an Illinois government instrumentality — and its wholly owned subsidiaries, HYW Mortgage LLC and HYW Mezzanine LLC, which are Delaware limited liability companies organized under the Delaware Limited Liability Company Act. These SPEs are not created by any governmental enabling act, are not designated as instrumentalities of any state, and do not possess any sovereign powers. They are standard commercial entities formed for the specific purpose of holding the leasehold interest in the Project site and borrowing under the loan facilities.

New York law does not automatically extend the tax-exempt status of a government instrumentality to its wholly owned subsidiaries. The question is whether, under the specific statutory provisions at issue (Tax Law § 252 for MRT, RPTL § 404 for real property tax, etc.), the exemption applies only to the instrumentality itself or extends to entities acting on behalf of or as agents of the instrumentality. This question is addressed in the specific sections below.

Relevance of MTDC's New York Operations. MTDC's operation of the Hudson Yards West project in New York does not, in itself, affect MTDC's governmental status. However, the fact that MTDC is conducting business in New York through locally organized SPEs raises questions regarding the SPEs' tax obligations in New York, separate and apart from MTDC's own exempt status. These issues are addressed in Sections V, VI, VII, and IX below.

IV. Federal Income Tax Treatment of Loan Interest

A. IRC § 103 — Tax-Exempt Bond Analysis

Section 103(a) of the Internal Revenue Code provides that, except as provided in subsections (b) and (c), gross income does not include interest on any state or local bond. For this purpose, a "state or local bond" is defined under IRC § 103(c)(1) as an obligation of a state or political subdivision thereof. The question presented is whether the Senior Mortgage Loan ($475,000,000) or the Mezzanine Loan ($200,000,000) constitutes an "obligation" of MTDC, the State of Illinois, or any political subdivision thereof, such that interest thereon would be excluded from the gross income of the lenders.

The Obligor Entities Are Not Governmental Units. The Senior Mortgage Loan is an obligation of HYW Mortgage LLC, a Delaware limited liability company. The Mezzanine Loan is an obligation of HYW Mezzanine LLC, also a Delaware limited liability company. Neither of these entities is a state, a political subdivision of a state, or an instrumentality of a state. As discussed in Section III.C above, the tax-exempt status of MTDC does not flow through to its wholly owned SPEs for this purpose. The IRC § 103 exclusion is limited to obligations of states and political subdivisions; it does not extend to obligations of private entities merely because they are owned by governmental units.

The Loans Are Not Issued by or on Behalf of a Governmental Unit. Even setting aside the identity of the borrower entities, the Senior Mortgage Loan and the Mezzanine Loan are bilateral bank loans negotiated between private lenders and the borrower SPEs. They are not bonds, notes, or other obligations issued by or on behalf of MTDC, the State of Illinois, or any political subdivision thereof. The IRC § 103 exclusion historically applies to publicly issued or privately placed bonds and notes that are issued by governmental units through the capital markets or through direct purchase programs, not to commercial bank loans made to private borrowers in the ordinary course of real estate finance.

MTDC Guarantee or Credit Support Does Not Change the Analysis. To the extent MTDC provides a guaranty, completion guaranty, carry guaranty, or other form of credit support for the Senior Mortgage Loan or the Mezzanine Loan (as is anticipated under the term sheets), such credit support does not convert the underlying loan obligations into obligations of MTDC for purposes of IRC § 103. The IRS has consistently held that the guaranty of an obligation by a governmental unit does not cause the guaranteed obligation to be treated as an obligation of the governmental unit. See Rev. Rul. 77-165, 1977-1 C.B. 21; see also Treas. Reg. § 1.103-1(a).

Conclusion. Interest paid on the Senior Mortgage Loan and the Mezzanine Loan is not exempt from federal income tax under IRC § 103. All lenders — Ironclad Capital Partners, Ridgeline Credit Solutions, Atlas Mutual Assurance, Commonwealth Trust Company, Harborview Capital Group, Meridian Pacific Lending (as senior loan participants), and Granite Peak Capital Management — must treat interest income received on these loans as taxable income for federal income tax purposes.

B. Alternative Analysis — If MTDC Were the Direct Borrower

We have considered the hypothetical scenario in which MTDC, rather than the SPEs, were the direct borrower under the Senior Mortgage Loan and the Mezzanine Loan. Even in that scenario, we do not believe that interest on the loans would qualify for tax-exempt treatment under IRC § 103, for the following reasons:

Registered Form Requirement. IRC § 149(a) provides that, with limited exceptions, interest on a state or local bond is not excluded from gross income under § 103 unless the bond is in registered form. Commercial bank loans are typically not issued in registered form, and the Senior Mortgage Loan and Mezzanine Loan documents as currently drafted do not contemplate issuance in registered form. While it is theoretically possible to structure a bank loan in registered form, doing so would be unusual and would raise a number of practical complications.

Private Activity Bond Limitations. IRC § 141 imposes limitations on the tax-exempt status of "private activity bonds." A bond is a private activity bond if it is part of an issue in which (a) more than 10% of the proceeds are used for any private business use and (b) more than 10% of the payment of principal or interest is directly or indirectly secured by or paid from property used for a private business use. The Project includes approximately 1.2 million square feet of commercial office space and approximately 85,000 square feet of retail space, both of which would constitute private business use. The commercial components of the Project would almost certainly cause the loans to fail the private activity bond tests of IRC § 141, rendering the interest taxable even if the loans were otherwise structured to qualify under § 103.

Volume Cap Limitations. IRC § 146 imposes an annual volume cap on the aggregate amount of private activity bonds that may be issued in each state. Even if the loans could be structured to qualify as exempt-facility bonds or qualified bonds under one of the exceptions to the private activity bond rules, the $475,000,000 Senior Mortgage Loan alone would consume a substantial portion of Illinois's or New York's annual volume cap allocation. We are not aware of any allocation of volume cap having been obtained or requested for this Project.

No Restructuring Recommended. Based on the foregoing, we do not recommend restructuring the transaction to attempt to achieve tax-exempt interest treatment for the Senior Mortgage Loan or the Mezzanine Loan. The practical and legal obstacles are significant, and the costs and complexities of such a restructuring would substantially outweigh any potential benefit to the lenders.

C. Withholding Tax Considerations

Although the interest on the Senior Mortgage Loan and the Mezzanine Loan is taxable, certain withholding tax considerations merit attention if any participant lender or assignee is a non-U.S. person (i.e., a nonresident alien individual, a foreign corporation, a foreign partnership, or a foreign estate or trust).

Portfolio Interest Exemption. Under IRC § 871(h) (for nonresident alien individuals) and IRC § 881(c) (for foreign corporations), interest received by a non-U.S. person on "portfolio debt obligations" is exempt from the 30% withholding tax that would otherwise apply under IRC §§ 871(a) and 881(a). For this exemption to apply, the lender must provide a valid IRS Form W-8BEN or W-8BEN-E certifying its foreign status and eligibility for the exemption, and the interest must not be "effectively connected" with a U.S. trade or business of the lender. Additionally, the 10-percent shareholder rule and the bank interest exceptions must be satisfied. We recommend that the loan documents include appropriate representations and withholding provisions to address these requirements.

FATCA Compliance. The Foreign Account Tax Compliance Act ("FATCA"), codified at IRC §§ 1471–1474, imposes a 30% withholding tax on certain payments made to foreign financial institutions and certain non-financial foreign entities that fail to comply with FATCA reporting requirements. The loan documents should include standard FATCA representations and withholding provisions. We note that the actual payors of interest are HYW Mortgage LLC and HYW Mezzanine LLC, not MTDC; MTDC's status as a government instrumentality does not affect the FATCA withholding obligations of the SPE borrowers.

Coordination with Lender's Counsel. We recommend that Clearfield & Associates (Harrison Whitmore) confirm that the loan documents include appropriate tax withholding provisions, including FATCA representations and gross-up clauses, consistent with market practice for commercial real estate construction loans.

V. New York Mortgage Recording Tax Analysis

A. Statutory Framework — NY Tax Law Article 11 (§§ 250–262)

The New York mortgage recording tax is imposed by Article 11 of the New York Tax Law (§§ 250–262) on the recording of mortgages of real property within the State of New York. The tax is calculated based on the principal debt or obligation secured by the mortgage, and the applicable rates vary depending on the location of the property, the type of property, and the amount of the mortgage.

For commercial property located in New York City, the combined MRT rate is as follows:

The precise combined rate applicable to a commercial mortgage in excess of $500,000 in New York City is approximately 2.80%, comprising the state basic tax of 1.00%, the state additional tax of 0.25%, the NYC additional tax of 1.00%, and an MTA surcharge of 0.25%, plus the NYC additional surcharge of 0.30% for mortgages on property in NYC (the precise calculation depends on the specific components applicable to commercial mortgages, and we have computed the rate applicable to this transaction at approximately 2.80% of principal debt).

Application to Senior Mortgage Loan. For the Senior Mortgage Loan of $475,000,000, if MRT is payable at the full combined rate of approximately 2.80%, the potential MRT liability is approximately $13,300,000 (calculated as $475,000,000 × 0.028 = $13,300,000, subject to de minimis adjustments for the reduced rate on the first $500,000 of principal debt, which are not material at this scale).

This is a substantial closing cost that must be accounted for in the sources-and-uses analysis and that will directly impact the economics of the transaction.

Application to Mezzanine Loan. The Mezzanine Loan of $200,000,000 is secured by a pledge of HYW Mezzanine LLC's membership interests in HYW Mortgage LLC, which is a security interest in personal property under the Uniform Commercial Code, not a mortgage of real property. MRT is imposed only on the recording of mortgages of real property (or interests therein); a UCC security interest in membership interests of a limited liability company does not constitute a mortgage for MRT purposes. Accordingly, MRT is generally not applicable to the Mezzanine Loan.

However, we note a limited caveat: if any component of the Mezzanine Loan collateral is characterized as a direct interest in real property (as opposed to an interest in the entity that holds real property), MRT exposure could arise. The New York DTF and courts have historically drawn a clear distinction between pledges of equity interests and mortgages of real property for MRT purposes, but we recommend that the mezzanine loan documents be drafted carefully to ensure that the collateral is clearly characterized as personal property (membership interests) and not as a real property interest.

B. Government Instrumentality Exemption — NY Tax Law § 252

Section 252 of the New York Tax Law provides an exemption from MRT for mortgages made to or by certain governmental entities. Specifically, § 252 exempts from the MRT any mortgage given by the State of New York, any political subdivision thereof, or any public benefit corporation, and any mortgage given by the United States or any instrumentality thereof. Section 252 also contains a broader provision exempting mortgages given to or by entities that are exempt from taxation by reason of law.

Key Question: Applicability to MTDC. MTDC is a government instrumentality of the State of Illinois, not of the State of New York. Section 252, on its face, exempts mortgages given by the State of New York, its political subdivisions, and its public benefit corporations. It does not explicitly reference instrumentalities of other states. However, the broader language of § 252 — exempting mortgages by entities that are "exempt from taxation by reason of law" — could encompass an Illinois government instrumentality, particularly if MTDC's exempt status is recognized under principles of interstate comity.

The New York DTF has issued advisory opinions addressing the scope of the § 252 exemption. In TSB-A-03(1)R (Jan. 2003), the DTF concluded that a mortgage given by a public authority created by another state was exempt from MRT under § 252, on the theory that the authority was exempt from taxation "by reason of law" (i.e., its enabling legislation and the constitutional doctrine of intergovernmental tax immunity). While the specific facts of that opinion differ from the present case, the principle supports the argument that MTDC's Illinois instrumentality status could be recognized for purposes of the New York MRT exemption.

Key Issue: SPE as Mortgagor. Even if MTDC itself qualifies for the § 252 exemption, the critical issue is whether the exemption extends to HYW Mortgage LLC, the entity that will execute the mortgage as mortgagor. HYW Mortgage LLC is not a government instrumentality; it is a Delaware limited liability company organized under general-purpose entity law. If the mortgage is given solely by HYW Mortgage LLC, the exemption may not apply.

Two theories could support extending the exemption to HYW Mortgage LLC:

Agency Theory. If HYW Mortgage LLC can be characterized as the agent or nominee of MTDC, acting solely on behalf of MTDC in holding and mortgaging the property, then the mortgage could arguably be treated as a mortgage "by" MTDC for purposes of § 252. Under this theory, the form of the transaction (SPE as mortgagor) would be disregarded in favor of the substance (MTDC is the real party in interest and the ultimate beneficiary of the mortgage transaction).

This theory is plausible but faces significant challenges. The SPE separateness covenants imposed by Ironclad and Granite Peak — including requirements that HYW Mortgage LLC maintain separate books and records, hold itself out as a separate entity, refrain from commingling assets with MTDC, maintain at least one independent director (or independent manager) on its governing body, and observe all corporate formalities — are specifically designed to prevent HYW Mortgage LLC from being treated as the alter ego or agent of MTDC. Indeed, the non-consolidation opinions required by the lenders (to be delivered by this Firm and/or special counsel) will opine that HYW Mortgage LLC is a separate legal entity whose assets would not be substantively consolidated with those of MTDC in a bankruptcy or insolvency proceeding.

These separateness requirements and non-consolidation opinions may directly undercut the agency theory for MRT exemption purposes. If HYW Mortgage LLC is maintained as a separate entity for bankruptcy purposes, it is difficult to argue simultaneously that it is merely the agent of MTDC for MRT purposes. This tension is a fundamental structural challenge in the current transaction.

Alter Ego Theory. Alternatively, one might argue that HYW Mortgage LLC is the alter ego of MTDC because MTDC is its sole indirect owner, MTDC controls all of its activities, and HYW Mortgage LLC has no independent business purpose apart from serving as MTDC's vehicle for the Project. This argument is even weaker than the agency theory, given the lender-imposed separateness requirements, and we do not recommend relying on it.

C. Practical Considerations and Risk Assessment

Based on the analysis above, the availability of the MRT exemption for the Senior Mortgage Loan is uncertain under the current transaction structure. The key risk factors are as follows:

Risk of Challenge by NYC Register or DTF. If HYW Mortgage LLC claims an MRT exemption at the time of recording the mortgage, the New York City Register's office may reject the claim or refer it to the DTF for review. The Register's office has been known to apply the § 252 exemption conservatively, particularly in cases involving SPEs that are not themselves governmental entities. A challenge at the time of recording could delay the closing or require payment of the MRT with a subsequent claim for refund.

DTF Advisory Opinion. It would be possible to request an advisory opinion from the DTF on the applicability of the § 252 exemption to the specific facts of this transaction. However, advisory opinions typically take three to six months to process, and in some cases significantly longer. Given the target closing date of June 15, 2025, there is insufficient time to obtain an advisory opinion prior to closing. We note this option for consideration as a post-closing risk mitigation measure, but it is not a practical pre-closing solution.

Alternative Structuring — MTDC as Co-Mortgagor or Direct Mortgagor. The most robust approach to securing the MRT exemption would be to structure the mortgage so that MTDC itself is the mortgagor (or at least a co-mortgagor) of the property. If MTDC is a direct party to the mortgage, the § 252 exemption should apply to the mortgage because it would be given "by" a government instrumentality. Under this approach, HYW Mortgage LLC could still be the borrower under the loan agreement, with obligations to repay the loan, while MTDC would execute the mortgage as the entity granting the security interest in the leasehold.

This approach raises questions that must be discussed with the Real Estate group and with Clearfield & Associates (Harrison Whitmore), counsel to Ironclad. Ironclad may be unwilling to accept MTDC as the mortgagor if doing so creates complications for lender remedies, including foreclosure, appointment of a receiver, and enforcement against the collateral. In particular, if MTDC is a government instrumentality, it may be entitled to sovereign immunity protections that could impede the lender's ability to enforce the mortgage. We recommend that Douglas Fairchild and Grace Nakamura discuss this issue with Harrison Whitmore at the earliest opportunity.

Allocation of MRT Cost. Under the Senior Mortgage Loan Term Sheet dated February 28, 2025, the allocation of closing costs, including MRT, is to be agreed upon in the definitive loan documents. If the exemption is unavailable, the MRT of approximately $13,300,000 on the Senior Mortgage Loan is a material closing cost that will need to be borne by either the Borrower (HYW Mortgage LLC / MTDC) or the Lender (Ironclad). Market practice for commercial construction loans in New York generally places MRT on the borrower, but given the unique circumstances of this transaction, the allocation should be negotiated as part of the definitive documentation.

Impact on Sources and Uses. If the MRT exemption is not available and the borrower bears the $13,300,000 MRT cost, this amount must be funded from the capital stack. It is not clear from the current sources-and-uses analysis whether the $920,000,000 total project cost includes provision for MRT. If it does not, MTDC's equity contribution of $200,000,000 may need to be increased, or an additional source of funding will need to be identified. We recommend that the Real Estate team and MTDC's internal finance group (Priya Subramanian, CFO) confirm the treatment of MRT in the project budget.

Recommendation. We recommend the following course of action with respect to MRT:

1. Structure the mortgage to maximize exemption potential. The preferred approach is for MTDC to serve as co-mortgagor or direct mortgagor, with HYW Mortgage LLC as borrower under the loan agreement only. This structure provides the strongest basis for claiming the § 252 exemption.

2. Discuss the modified structure with Clearfield & Associates (Harrison Whitmore) to determine whether Ironclad will accept MTDC as mortgagor, and if so, what additional protections or modifications to the loan documents may be required.

3. As a fallback, budget for the full MRT of approximately $13,300,000 as a closing cost, and seek the exemption as a potential cost saving. If the exemption is claimed and challenged, the parties should be prepared to pay the MRT and seek a refund through administrative or judicial proceedings.

4. Consider requesting a DTF advisory opinion on the exemption, recognizing that such an opinion is unlikely to be obtained prior to the June 15, 2025 closing date. A post-closing advisory opinion could still be valuable if the exemption is claimed at closing and subsequently challenged.

VI. New York City Real Property Tax Analysis

A. General Taxability of the Project

The Project is located at 450 West 34th Street, in the Borough of Manhattan, City of New York (Block 729, Lots 1, 5, 12, and 15). For New York City real property tax purposes, the Project will be classified as Class 4 commercial property. The current Class 4 tax rate for the 2024–2025 fiscal year is approximately 10.684% of assessed value (which for Class 4 property is 45% of market value). At full valuation, the annual real property tax burden on a $1,025,000,000 property could be substantial — potentially in the range of $40,000,000 to $50,000,000 per year, depending on the assessed value assigned by the NYC Department of Finance.

However, the real property tax analysis for the Project is complicated by the ownership structure of the underlying land. The Project site is owned in fee by the City of New York (through NYCEDC), and the Ground Lease was executed on June 1, 2020, granting MTDC a long-term leasehold interest in the property. Because the fee interest is held by the City, the fee interest itself is exempt from real property tax. The question is whether the leasehold interest and the improvements to be constructed thereon are taxable, and if so, whether any exemptions or abatements apply.

Under New York City Department of Finance practice, a leasehold interest in City-owned property may be treated as taxable to the lessee if the property is used for private or commercial purposes. The improvements constructed by the lessee are generally taxable unless a specific exemption applies or a PILOT agreement has been negotiated.

B. Exemption under RPTL § 404 — Government Property

Section 404(1) of the New York Real Property Tax Law provides that real property owned by the United States, the State of New York, or any public corporation shall be exempt from taxation. The term "public corporation" is defined in the New York General Construction Law § 66 to include a municipal corporation or a district corporation, as well as a public benefit corporation. RPTL § 404 is the primary basis for the exemption of government-owned property from real property tax in New York.

Applicability to MTDC. The threshold question is whether MTDC qualifies as a "public corporation" under RPTL § 404. MTDC is not a New York public benefit corporation — it is an Illinois government instrumentality. The term "public corporation" as used in RPTL § 404 is defined with reference to New York law and does not, on its face, encompass entities created by other states. While principles of interstate comity might support an argument that an out-of-state government instrumentality should be treated as the equivalent of a New York public corporation for this purpose, we are not aware of any authority directly on point.

Applicability to HYW Mortgage LLC. Even if MTDC itself could claim an exemption under RPTL § 404, HYW Mortgage LLC — as the holder of the leasehold interest and the entity constructing the improvements — is a Delaware limited liability company and is not a "public corporation" under any definition. If HYW Mortgage LLC is the entity of record holding the leasehold, the § 404 exemption is unlikely to apply.

We note that the Ground Lease was executed between NYCEDC (as landlord) and MTDC (as tenant). If the leasehold has been or will be assigned to HYW Mortgage LLC, the entity holding the leasehold for tax assessment purposes would be HYW Mortgage LLC, not MTDC. The terms of the Ground Lease and any required consent to assignment should be reviewed to confirm the identity of the leasehold tenant of record.

Conclusion. A blanket exemption under RPTL § 404 is unlikely to be available for the Project, particularly if the leasehold is held by HYW Mortgage LLC rather than MTDC directly, and given the mixed-use character of the Project (which includes substantial commercial components that do not serve a traditional governmental purpose).

C. Exemption under RPTL § 412-a — Transit Facilities

Section 412-a of the RPTL provides an exemption from real property tax for property owned by or used for the purposes of public transit or transportation. This section was enacted to promote the development and maintenance of transit infrastructure and facilities.

Applicability to the Project. The Project includes approximately 45,000 square feet of public transit infrastructure improvements, including a below-grade connection to the No. 7 subway line extension at the 34th Street–Hudson Yards station and improvements to bus transit facilities along 34th Street. These transit-related components are directly related to the public transit purpose and may qualify for exemption under § 412-a.

However, the transit components represent only a small fraction of the overall Project (approximately 45,000 square feet out of a total of approximately 1,330,000 square feet, or roughly 3.4%). The overwhelming majority of the Project consists of commercial office space (approximately 1,200,000 square feet) and retail space (approximately 85,000 square feet), which are commercial uses that do not qualify for the transit facilities exemption.

Allocation Between Exempt and Taxable Components. If the § 412-a exemption is claimed, it would likely apply only to the transit-related portions of the Project. An allocation of the assessed value between the exempt transit components and the taxable commercial components would be required. The NYC Department of Finance would need to determine the appropriate allocation methodology, which could be based on square footage, construction cost, or other factors.

NYC Transit Infrastructure Grant. The $45,000,000 NYC Transit Infrastructure Grant is specifically designated for the transit components of the Project. The existence of this grant supports the argument that the transit components serve a distinct public transit purpose and should be eligible for a separate tax treatment. However, the grant itself does not automatically confer tax-exempt status on the transit components.

Conclusion. The § 412-a exemption may be available for the transit-related components of the Project, but it would not extend to the commercial office and retail components. A full exemption for the entire Project under § 412-a is not available.

D. Payment in Lieu of Taxes (PILOT) Structure

Given the limitations of the RPTL § 404 and § 412-a exemptions, the most likely real property tax treatment for the Project is a Payment in Lieu of Taxes ("PILOT") arrangement negotiated between MTDC and NYCEDC (on behalf of the City of New York).

Standard NYCEDC PILOT Structure. NYCEDC commonly enters into PILOT agreements with lessees of City-owned property in connection with development projects. Under a typical PILOT structure, the lessee makes annual payments to the City in lieu of full real property taxes. The PILOT payments are generally set at a level below the full tax that would otherwise be payable, with the abatement reflecting the public purpose served by the project (in this case, transit-oriented development) and the economic development benefits generated by the project.

PILOT payments typically escalate over time, often starting at a significantly reduced level during the construction period and ramping up to a stabilized level that may be a negotiated percentage of full taxes. The terms of the PILOT are set forth in a PILOT Agreement, which is a binding contract between the City (through NYCEDC or another City agency) and the lessee.

Ground Lease Provisions. The Ground Lease between NYCEDC and MTDC, executed on June 1, 2020, likely contains provisions regarding real property taxes and PILOT obligations. We recommend that the Real Estate team review the Ground Lease to confirm whether a PILOT obligation is already established or whether the Ground Lease contemplates negotiation of a PILOT at a later date (e.g., upon commencement of construction or upon stabilization).

Interaction with Lender Requirements. Both Ironclad and Granite Peak will require that PILOT payments be treated as an operating expense of the Project for purposes of calculating NOI, DSCR, and debt yield. The Senior Mortgage Loan Term Sheet requires a minimum combined DSCR of 1.20x and a minimum debt yield of 8.0%, calculated after deduction of all operating expenses, including real property taxes or PILOT payments. The level of the PILOT will therefore have a direct impact on the financial covenants and the viability of the loan.

Additionally, the lenders will require that PILOT payments be included in the cash flow waterfall and that adequate reserves be maintained for PILOT obligations. The PILOT Agreement itself may need to be approved by the lenders, and the lenders may require a subordination, non-disturbance, and attornment agreement ("SNDA") with NYCEDC to protect their interests in the event of a default under the Ground Lease or the PILOT Agreement.

PILOT Negotiation Status. We understand from preliminary discussions with Marcus Jennings (MTDC Vice President, Real Estate Development) and Connor McBride (Project Director) that PILOT negotiations with NYCEDC are ongoing but that no final term sheet or agreement has been executed. We recommend that the Real Estate team request a current PILOT term sheet or summary from NYCEDC and/or Connor McBride as soon as practicable, as the PILOT terms will affect the loan underwriting and the financial models.

E. Impact on Underwriting and Loan Covenants

The real property tax treatment of the Project — whether full taxes, PILOT, or partial exemption — will have a significant impact on the underwriting of the Senior Mortgage Loan and the Mezzanine Loan. The key metrics affected are as follows:

Net Operating Income. The projected stabilized NOI of $58,200,000 per year is based on certain assumptions regarding real property tax or PILOT payments. If these assumptions are incorrect — for example, if the PILOT is higher than assumed or if full taxes are payable — the actual NOI could be materially lower than projected.

Debt Service Coverage Ratio. The combined DSCR covenant requires a minimum of 1.20x, calculated as NOI divided by combined annual debt service on the Senior Mortgage Loan and the Mezzanine Loan. A reduction in NOI resulting from higher-than-expected real property tax or PILOT payments would directly reduce the DSCR and could cause a covenant violation.

Debt Yield. The debt yield covenant requires a minimum of 8.0%, calculated as NOI divided by the combined outstanding loan balance ($675,000,000). A reduction in NOI from $58,200,000 to below $54,000,000 (approximately) would cause the debt yield to fall below 8.0%.

Loan-to-Value Ratio. The maximum combined LTV covenant is 70.0%, calculated as the combined outstanding loan balance divided by the appraised value of the Project. The Broadstreet Appraisal (Report No. BAG-25-1092, dated April 1, 2025) concluded to an as-stabilized appraised value of $1,025,000,000, yielding a combined LTV of approximately 65.9% ($675,000,000 / $1,025,000,000). However, the appraised value may have been predicated on specific assumptions regarding real property tax or PILOT payments. If the actual tax burden is higher than assumed in the appraisal, the appraised value could be lower, potentially causing an LTV covenant violation.

Recommendation. We recommend that the Real Estate team confirm the specific real property tax or PILOT assumptions used in the Broadstreet Appraisal (by contacting Marcus Tolliver, MAI, the appraiser of record) and in the borrower's operating projections. If the assumptions differ from the expected PILOT terms, the financial models and covenant calculations should be adjusted accordingly. A detailed sensitivity analysis is provided in Appendix C to this memorandum.

VII. Transfer Tax Considerations

A. New York State Real Estate Transfer Tax (RETT)

The New York State Real Estate Transfer Tax ("RETT") is imposed under Article 31 of the New York Tax Law (§§ 1400–1412) on the conveyance of real property or interests therein within the State of New York. The RETT rate is $2.00 per $500 of consideration (0.4%), with an additional "mansion tax" surcharge applicable to residential property.

Ground Lease Conveyance — Already Completed. The execution and delivery of the Ground Lease on June 1, 2020, constituted a conveyance of a leasehold interest in real property for RETT purposes. Pursuant to Tax Law § 1401(e), a conveyance includes the creation of a leasehold interest in real property for a term of 49 years or more (including renewal options). The Ground Lease between NYCEDC and MTDC is understood to be a long-term lease that exceeds this threshold. We assume that RETT was paid (or that an exemption was properly claimed) at the time the Ground Lease was recorded in June 2020 (CRFN 2020000198762). We recommend confirming this assumption as part of the diligence process.

Transfer of Controlling Interests in the SPEs. Tax Law § 1401(e) also defines "conveyance" to include the transfer or acquisition of a "controlling interest" in an entity that owns real property in New York. A "controlling interest" means, in the case of a limited liability company, 50% or more of the capital, profits, or beneficial interest. Any future transfer of MTDC's membership interests in HYW Mezzanine LLC or HYW Mortgage LLC (whether through a sale, restructuring, joint venture, or other disposition) could constitute a "controlling interest" transfer subject to RETT.

At the present time, there is no transfer of controlling interests contemplated in connection with the financing. However, the parties should be aware of this potential RETT exposure in connection with any future sale, refinancing, or restructuring of the Project.

Government Instrumentality Exemption. Tax Law § 1405(b)(1) provides an exemption from RETT for conveyances to or from the United States, the State of New York, or any of their instrumentalities, agencies, or political subdivisions. As with the MRT exemption under § 252, the key question is whether this exemption extends to MTDC as an Illinois government instrumentality and, if so, whether it extends to the Delaware SPEs.

The analysis is similar to the MRT exemption analysis in Section V.B above. MTDC itself may qualify for the § 1405(b)(1) exemption under principles of interstate comity, but the exemption may not extend to the SPEs. For current purposes, this issue is academic because no RETT-triggering conveyance is contemplated in connection with the financing. However, if a future transfer or restructuring is considered, the RETT exemption should be analyzed in detail.

B. NYC Real Property Transfer Tax (RPTT)

The New York City Real Property Transfer Tax ("RPTT") is imposed under Chapter 21 of the NYC Administrative Code (§§ 11-2101 through 11-2114) on the conveyance of real property or economic interests therein within the City of New York. The RPTT is imposed in addition to the State RETT. For commercial property, the RPTT rate is 1.425% of consideration for transfers where the consideration exceeds $500,000.

Exemption for Government Entities. NYC Administrative Code § 11-2106 provides an exemption from RPTT for conveyances to or from the United States, the State of New York, the City of New York, or any of their instrumentalities, agencies, or political subdivisions. The scope of this exemption is similar to the RETT exemption under Tax Law § 1405(b)(1), and the same analytical issues apply regarding MTDC's status as an out-of-state instrumentality and the treatment of its Delaware SPEs.

Current Exposure. No RPTT-triggering event is contemplated in connection with the current financing. The Ground Lease conveyance was completed in June 2020, and any RPTT obligation arising from that conveyance was either paid or exempted at that time. However, as with RETT, any future transfer of controlling interests in the SPEs would need to be analyzed for RPTT purposes.

Conclusion. There is no current RETT or RPTT exposure in connection with the financing. Future transfers of controlling interests in HYW Mortgage LLC or HYW Mezzanine LLC would require separate analysis under both RETT and RPTT, and the availability of the government instrumentality exemption would depend on the specific structure and circumstances of any such transfer.

VIII. Federal Tax-Exempt Entity Considerations

A. MTDC's Federal Tax-Exempt Status under IRC § 115

As discussed in Section III.B above, MTDC's income from the exercise of essential governmental functions is excluded from gross income under IRC § 115(1). This exclusion extends to income earned by MTDC through its

CALDERWOOD & HARKNESS LLP One Liberty Plaza, 55th Floor New York, NY 10006
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Douglas Fairchild, Partner, Real Estate Angela Fontaine, Partner, Real Estate Grace Nakamura, Senior Associate, Real Estate
FROM: Sylvia Hartwell, Partner, Tax
DATE: April 29, 2025
RE: Tax-Exempt Status of Metropolitan Transit Development Corp. — Implications for Hudson Yards West Financing Matter No. 1031-00004
I. Executive Summary
This memorandum addresses three principal tax questions that have arisen in connection with the proposed construction financing of the Hudson Yards West project (the "Project") at 450 West 34th Street, New York, New York 10001. The borrowing entities are Hudson Yards West Mortgage LLC ("HYW Mortgage LLC") and Hudson Yards West Mezzanine LLC ("HYW Mezzanine LLC"), each a Delaware limited liability company ultimately owned by the Metropolitan Transit Development Corporation ("MTDC"), an Illinois government instrumentality. The senior mortgage loan of $475,000,000 (the "Senior Mortgage Loan") is being provided by Ironclad Capital Partners, with participation from Ridgeline Credit Solutions, Atlas Mutual Assurance, Commonwealth Trust Company, Harborview Capital Group, and Meridian Pacific Lending. The mezzanine loan of $200,000,000 (the "Mezzanine Loan") is being provided by Granite Peak Capital Management.
The three principal questions addressed herein are:
(a) whether interest on the Senior Mortgage Loan and the Mezzanine Loan is exempt from federal income tax under Internal Revenue Code ("IRC") § 103 or any other applicable provision;
(b) whether the Senior Mortgage Loan and/or the Mezzanine Loan qualify for an exemption from New York State and New York City mortgage recording tax ("MRT") under New York Tax Law § 252 or any related provision; and
(c) whether the Project qualifies for a real property tax exemption under the New York Real Property Tax Law ("RPTL") § 404, § 412-a, or an alternative Payment in Lieu of Taxes ("PILOT") structure, and the implications of the applicable tax treatment for the loan underwriting and financial covenants.
Our bottom-line conclusions, each of which is discussed at length in the sections that follow, are as follows:
Government Instrumentality Status. MTDC is a government instrumentality of the State of Illinois for purposes of federal, New York State, and New York City tax law. However, the Borrower SPEs — HYW Mortgage LLC and HYW Mezzanine LLC — are Delaware limited liability companies that are not themselves government instrumentalities. Tax-exempt status does not automatically flow through to these SPEs absent specific statutory provisions or a viable agency theory, and the single-purpose entity requirements imposed by the lenders may undercut such an agency theory.
Federal Income Tax Treatment of Loan Interest. Interest on the Senior Mortgage Loan and the Mezzanine Loan is not tax-exempt interest for federal income tax purposes. The loans are not "obligations" of a state or political subdivision within the meaning of IRC § 103. Even if the loans were restructured so that MTDC were the direct borrower, bank loans to government instrumentalities do not qualify as tax-exempt obligations under IRC § 103 unless they are issued in registered form and satisfy the requirements of IRC § 149, among other conditions, including private activity bond limitations that would likely apply given the commercial components of the Project. Lenders — Ironclad, Granite Peak, and all participants — should not expect tax-exempt treatment of interest income.
Mortgage Recording Tax. The MRT exemption under New York Tax Law § 252 is potentially available with respect to the Senior Mortgage Loan if the mortgage is structured so that MTDC is the direct mortgagor, or if certain conditions are met to support the argument that HYW Mortgage LLC is acting as the agent or alter ego of MTDC. If the exemption is not available, the potential MRT liability on the Senior Mortgage Loan of $475,000,000 is approximately $13,300,000, a material closing cost that would need to be allocated between the parties. The Mezzanine Loan, which is secured by a pledge of membership interests rather than a mortgage on real property, is generally not subject to MRT. We recommend careful structuring and consultation with Clearfield & Associates (Harrison Whitmore) regarding Ironclad's willingness to accept a modified mortgagor structure.
Real Property Tax. A full exemption from real property tax under RPTL § 404 or § 412-a is unlikely for the entirety of the Project given its mixed-use character, which includes substantial commercial and office components. However, because the Project is located on land owned by the City of New York (through NYCEDC) and leased to MTDC pursuant to a ground lease, a PILOT structure is the expected and most likely outcome. The terms of the PILOT will have a significant impact on projected net operating income ("NOI"), the combined debt service coverage ratio ("DSCR") covenant of 1.20x, the debt yield covenant of 8.0%, and the loan-to-value ("LTV") covenant of 70.0%. PILOT negotiation with NYCEDC is a critical path item for the financing.
The balance of this memorandum sets forth the detailed analysis supporting these conclusions, together with specific recommendations for structuring, diligence, and coordination among the deal team.
II. Scope of Analysis and Assumptions
A. Documents Reviewed
In preparing this memorandum, we have reviewed the following documents and materials:
1. MTDC Enabling Statute: 70 ILCS 3615/1.01 et seq. (Illinois Regional Transportation Authority Act, as amended), together with the specific provisions of 70 ILCS 3620/1 et seq. (Metropolitan Transit Development Corporation Act), which created MTDC as an independent government instrumentality of the State of Illinois.
2. MTDC Charter and Bylaws, as amended through January 15, 2024, certified by Lydia Okafor, General Counsel of MTDC.
3. Ground Lease between New York City Economic Development Corporation ("NYCEDC"), as landlord, and Metropolitan Transit Development Corporation, as tenant, dated as of June 1, 2020, recorded in the Office of the City Register of the City of New York on June 12, 2020, at CRFN 2020000198762 (the "Ground Lease").
4. Senior Mortgage Loan Term Sheet dated February 28, 2025, between Ironclad Capital Partners ("Ironclad") and HYW Mortgage LLC, setting forth the principal terms of the Senior Mortgage Loan in the amount of $475,000,000 at a rate of Term SOFR + 425 basis points (SOFR floor of 1.00%).
5. Mezzanine Loan Term Sheet dated March 7, 2025, between Granite Peak Capital Management ("Granite Peak") and HYW Mezzanine LLC, setting forth the principal terms of the Mezzanine Loan in the amount of $200,000,000 at a fixed rate of 11.50%.
6. Draft Organizational Documents for HYW Mortgage LLC and HYW Mezzanine LLC, including Certificates of Formation, Limited Liability Company Agreements, and related resolutions, provided by Grace Nakamura on March 22, 2025.
7. Uniform Land Use Review Procedure ("ULURP") Approval: Application No. C 230415 ZSM, City Planning Commission approval dated September 12, 2023, and City Council approval dated October 25, 2023.
8. Whitfield Albrecht LLP Audited Financial Statements for MTDC, for the fiscal year ended December 31, 2024 ("FY2024 Financial Statements"), including notes to financial statements and auditor's report (unqualified opinion).
9. Pinnacle Ratings Group Credit Rating Report, Report No. PRG-MTDC-A-2024-1187, dated November 8, 2024, assigning MTDC a long-term issuer credit rating of A– with stable outlook.
10. Broadstreet Appraisal Group Appraisal Report No. BAG-25-1092, dated April 1, 2025, prepared by Marcus Tolliver, MAI, concluding to an as-stabilized appraised value of the Project of $1,025,000,000 (the "Broadstreet Appraisal").
11. Various internal working drafts of the Senior Mortgage Loan Agreement, Mezzanine Loan Agreement, Mortgage, Security Agreement, and related ancillary documents, as provided by our Real Estate group.
B. Factual Assumptions
We have assumed the following facts for purposes of this analysis. We have not independently verified these facts and have relied on the representations of MTDC, its advisors, and the documents listed above.
• Total Project Cost: $920,000,000, consisting of hard construction costs, soft costs, financing costs, and reserves.
• Capital Stack:
• Project Site: Block 729, Lots 1, 5, 12, and 15, in the Borough of Manhattan, City of New York, commonly known as 450 West 34th Street, New York, New York 10001.
• Project Description: The Project is a mixed-use development consisting of approximately 1.2 million square feet of commercial office space, approximately 85,000 square feet of ground-floor and below-grade retail space, and approximately 45,000 square feet of public transit infrastructure improvements, including a below-grade connection to the No. 7 subway line extension at the 34th Street–Hudson Yards station and improvements to bus transit facilities along 34th Street.
• Projected Stabilized NOI: $58,200,000 per year, as set forth in the Borrower's operating projections and underwritten by Ironclad and Granite Peak.
• As-Stabilized Appraised Value: $1,025,000,000, per the Broadstreet Appraisal (Report No. BAG-25-1092, dated April 1, 2025).
• Target Closing Date: June 15, 2025.
C. Structural Assumptions
The current proposed transaction structure is as follows:
• HYW Mortgage LLC, a Delaware limited liability company, is the borrower under the Senior Mortgage Loan and the holder of the leasehold interest in the Project site under the Ground Lease (or an assignment thereof). HYW Mortgage LLC will grant a leasehold mortgage on the Project to Ironclad as security for the Senior Mortgage Loan.
• HYW Mezzanine LLC, a Delaware limited liability company, is the borrower under the Mezzanine Loan. HYW Mezzanine LLC holds 100% of the membership interests in HYW Mortgage LLC. The Mezzanine Loan is secured by a first-priority pledge of HYW Mezzanine LLC's membership interests in HYW Mortgage LLC.
• Both HYW Mortgage LLC and HYW Mezzanine LLC are wholly owned, directly or indirectly, by MTDC. Specifically, MTDC holds 100% of the membership interests in HYW Mezzanine LLC, which in turn holds 100% of the membership interests in HYW Mortgage LLC.
• Both SPEs are organized as single-purpose entities under Delaware law, with separateness covenants, independent directors (or independent managers), and non-consolidation opinion requirements imposed by the lenders. These structural features are standard in commercial real estate finance transactions and are required by both Ironclad and Granite Peak.
D. Governing Law Assumptions
• New York law governs the loan documents, the Ground Lease, and the mortgage and security instruments.
• Illinois law governs MTDC's existence, powers, and authority to enter into the transactions contemplated by the loan documents.
• Federal tax law (the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder) applies to the federal income tax questions presented.
• New York State and New York City tax law, including the New York Tax Law, the New York Real Property Tax Law, and the New York City Administrative Code, apply to the state and local tax questions presented.
III. Analysis of MTDC's Government Instrumentality Status
The threshold question in this analysis is whether MTDC qualifies as a government instrumentality for tax purposes. This determination is relevant to each of the specific tax questions addressed below and must be analyzed under federal, Illinois, and New York law.
A. Illinois Law — Enabling Legislation and Characteristics
MTDC was created pursuant to the Metropolitan Transit Development Corporation Act, 70 ILCS 3620/1 et seq. (the "Enabling Act"), enacted by the Illinois General Assembly in 1983 and amended on multiple occasions thereafter. The Enabling Act declares MTDC to be "a body politic and corporate, and an instrumentality of the State of Illinois," created for the purpose of promoting, developing, constructing, and operating transit-oriented development projects in the State of Illinois and in other jurisdictions where such development serves the public transit interests of the State. MTDC is authorized to act in furtherance of an essential governmental function — namely, the development and improvement of public transit infrastructure and transit-oriented real estate to support the growth and efficiency of public transportation systems.
The following characteristics of MTDC are indicative of its status as a government instrumentality under Illinois law:
Legislative Creation. MTDC was created by an affirmative act of the Illinois General Assembly, not by private incorporation under the Illinois Business Corporation Act or any general-purpose entity statute. The Enabling Act sets forth MTDC's purposes, powers, governance structure, and relationship to the State of Illinois in specific detail.
Essential Governmental Function. MTDC's statutory purpose — the development, construction, and operation of transit-oriented development projects — is an essential governmental function. Public transit development has long been recognized as a core governmental responsibility, and MTDC's activities are directly connected to the provision and improvement of public transit infrastructure.
Government-Appointed Governing Body. MTDC is governed by a Board of Directors consisting of eleven members, a majority of whom are appointed by the Governor of Illinois with the advice and consent of the Illinois Senate. The Chair of the Board, Margaret Kowalski, was appointed by Governor Pritzker and confirmed by the Senate in 2021. Three additional directors are appointed by the Mayor of Chicago, and two are appointed by the President of the Cook County Board. This governance structure ensures that MTDC is subject to governmental control and oversight.
Eminent Domain Power. Under Section 15 of the Enabling Act, MTDC is authorized to exercise the power of eminent domain within the State of Illinois for the purpose of acquiring property necessary to carry out its statutory functions. The delegation of sovereign power is among the most significant indicators of instrumentality status under both federal and state law.
Open Government Requirements. MTDC is subject to the Illinois Open Meetings Act (5 ILCS 120/1 et seq.) and the Illinois Freedom of Information Act (5 ILCS 140/1 et seq.), confirming its status as a governmental entity subject to public accountability and transparency requirements.
Scale of Operations. MTDC's FY2024 audited financial statements, prepared by Whitfield Albrecht LLP, reflect total operating revenue of $1,120,000,000 and net assets of $3,700,000,000. MTDC maintains a real estate portfolio valued at approximately $4,800,000,000 across eleven states, including properties that integrate transit infrastructure with commercial, residential, and mixed-use development. These figures reflect public-scale operations consistent with a major government instrumentality.
Credit Quality. Pinnacle Ratings Group has assigned MTDC a long-term issuer credit rating of A– with a stable outlook (Report No. PRG-MTDC-A-2024-1187, dated November 8, 2024). The Pinnacle report notes that MTDC's creditworthiness is supported by its governmental status, diversified revenue base, and strong relationship with the State of Illinois and its political subdivisions.
Senior Management. MTDC's organizational structure is consistent with that of a government instrumentality. David Harrington serves as Executive Director (chief executive officer), Priya Subramanian serves as Chief Financial Officer, and Lydia Okafor serves as General Counsel. Each of these officers was appointed by the Board of Directors and serves at the pleasure of the Board.
Based on the foregoing, we conclude that MTDC is a government instrumentality of the State of Illinois as a matter of Illinois law. This conclusion is supported by the explicit language of the Enabling Act, the characteristics of MTDC's governance and operations, and the delegation of sovereign powers to MTDC by the Illinois General Assembly.
B. Federal Tax Classification — IRC § 115 and Revenue Ruling Analysis
For federal income tax purposes, the classification of an entity as a government instrumentality determines, among other things, whether the entity's income is excluded from gross income under IRC § 115 and whether obligations issued by the entity may qualify for tax-exempt treatment under IRC § 103.
IRC § 115. Section 115(1) of the Internal Revenue Code provides that gross income does not include income derived from the exercise of any essential governmental function and accruing to a state or any political subdivision thereof. This exclusion applies to instrumentalities of states and political subdivisions to the extent they are performing essential governmental functions. The scope of § 115 is not limited to the states themselves but extends to entities that are integral parts of or are controlled by state and local governments.
Treasury Regulations and IRS Guidance. Treasury Regulation § 1.103-1(b) provides that the term "political subdivision" denotes any division of any state or local governmental unit which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of the unit. While this regulation was promulgated in connection with § 103 (pertaining to tax-exempt bonds), the IRS has applied similar principles in determining instrumentality status for purposes of § 115. The IRS has applied a multi-factor test, derived from a series of revenue rulings and private letter rulings, to determine whether an entity qualifies as an instrumentality of a state or political subdivision. The factors most commonly considered include:
1. Delegation of Sovereign Power. Whether the entity has been delegated the right to exercise one or more sovereign powers, such as the power of eminent domain, the police power, or the power to tax. MTDC has been delegated the power of eminent domain under Section 15 of the Enabling Act.
2. Government Control. Whether the entity is subject to control or supervision by a governmental unit. MTDC's Board of Directors is composed predominantly of gubernatorial and mayoral appointees, and MTDC is subject to the Illinois Open Meetings Act and FOIA.
3. Government Financial Interest. Whether the state or political subdivision has a financial interest in the entity, including the right to receive assets upon dissolution. Under Section 25 of the Enabling Act, upon dissolution of MTDC, all remaining assets revert to the State of Illinois.
4. Government-Appointed Governing Body. Whether the entity's governing body is appointed by governmental officials. As discussed above, a majority of MTDC's Board members are appointed by the Governor, with additional members appointed by the Mayor of Chicago and the President of the Cook County Board.
5. Tax-Exempt Purpose. Whether the entity was created to serve a public or governmental purpose. MTDC was created for the express purpose of promoting and developing transit-oriented projects in the public interest.
6. Designation as Instrumentality. Whether the entity is designated as an instrumentality of the state by its enabling legislation. The Enabling Act expressly designates MTDC as "an instrumentality of the State of Illinois."
Applying these factors, we conclude that MTDC satisfies each of the criteria for classification as a government instrumentality of the State of Illinois for federal tax purposes. MTDC's income from the exercise of essential governmental functions is excluded from gross income under IRC § 115(1), and MTDC itself is not subject to federal income tax on such income.
We note, however, that the question of whether any particular activity of MTDC constitutes an "essential governmental function" is a facts-and-circumstances determination. As discussed in Section VIII below, the commercial real estate development activities at Hudson Yards West may raise questions as to whether the income derived therefrom is exempt under § 115, particularly to the extent that the Project includes substantial commercial office and retail components.
C. New York Law — Recognition of Out-of-State Government Instrumentalities
For purposes of the New York State and New York City tax questions addressed in this memorandum — including MRT, real property tax, RETT, RPTT, and UBT — it is necessary to determine whether MTDC's status as an Illinois government instrumentality is recognized under New York law.
Comity Principles. New York courts and administrative authorities have generally recognized the governmental status of entities created by other states, applying principles of interstate comity. The New York Court of Appeals has held that an entity created by another state as a government instrumentality is entitled to be treated as such in New York, absent a specific New York statute to the contrary. See, e.g., Port Auth. Trans-Hudson Corp. v. Feeney, 495 U.S. 299 (1990) (discussing interstate comity for government entities); Agway, Inc. v. Williams, 68 N.Y.2d 113 (1986) (applying comity principles in tax context). The New York Department of Taxation and Finance ("DTF") has issued advisory opinions recognizing the tax-exempt status of out-of-state government instrumentalities for various purposes, including MRT and RETT exemptions.
Distinction Between MTDC and Its SPEs. It is critical to distinguish between MTDC itself — which is an Illinois government instrumentality — and its wholly owned subsidiaries, HYW Mortgage LLC and HYW Mezzanine LLC, which are Delaware limited liability companies organized under the Delaware Limited Liability Company Act. These SPEs are not created by any governmental enabling act, are not designated as instrumentalities of any state, and do not possess any sovereign powers. They are standard commercial entities formed for the specific purpose of holding the leasehold interest in the Project site and borrowing under the loan facilities.
New York law does not automatically extend the tax-exempt status of a government instrumentality to its wholly owned subsidiaries. The question is whether, under the specific statutory provisions at issue (Tax Law § 252 for MRT, RPTL § 404 for real property tax, etc.), the exemption applies only to the instrumentality itself or extends to entities acting on behalf of or as agents of the instrumentality. This question is addressed in the specific sections below.
Relevance of MTDC's New York Operations. MTDC's operation of the Hudson Yards West project in New York does not, in itself, affect MTDC's governmental status. However, the fact that MTDC is conducting business in New York through locally organized SPEs raises questions regarding the SPEs' tax obligations in New York, separate and apart from MTDC's own exempt status. These issues are addressed in Sections V, VI, VII, and IX below.
IV. Federal Income Tax Treatment of Loan Interest
A. IRC § 103 — Tax-Exempt Bond Analysis
Section 103(a) of the Internal Revenue Code provides that, except as provided in subsections (b) and (c), gross income does not include interest on any state or local bond. For this purpose, a "state or local bond" is defined under IRC § 103(c)(1) as an obligation of a state or political subdivision thereof. The question presented is whether the Senior Mortgage Loan ($475,000,000) or the Mezzanine Loan ($200,000,000) constitutes an "obligation" of MTDC, the State of Illinois, or any political subdivision thereof, such that interest thereon would be excluded from the gross income of the lenders.
The Obligor Entities Are Not Governmental Units. The Senior Mortgage Loan is an obligation of HYW Mortgage LLC, a Delaware limited liability company. The Mezzanine Loan is an obligation of HYW Mezzanine LLC, also a Delaware limited liability company. Neither of these entities is a state, a political subdivision of a state, or an instrumentality of a state. As discussed in Section III.C above, the tax-exempt status of MTDC does not flow through to its wholly owned SPEs for this purpose. The IRC § 103 exclusion is limited to obligations of states and political subdivisions; it does not extend to obligations of private entities merely because they are owned by governmental units.
The Loans Are Not Issued by or on Behalf of a Governmental Unit. Even setting aside the identity of the borrower entities, the Senior Mortgage Loan and the Mezzanine Loan are bilateral bank loans negotiated between private lenders and the borrower SPEs. They are not bonds, notes, or other obligations issued by or on behalf of MTDC, the State of Illinois, or any political subdivision thereof. The IRC § 103 exclusion historically applies to publicly issued or privately placed bonds and notes that are issued by governmental units through the capital markets or through direct purchase programs, not to commercial bank loans made to private borrowers in the ordinary course of real estate finance.
MTDC Guarantee or Credit Support Does Not Change the Analysis. To the extent MTDC provides a guaranty, completion guaranty, carry guaranty, or other form of credit support for the Senior Mortgage Loan or the Mezzanine Loan (as is anticipated under the term sheets), such credit support does not convert the underlying loan obligations into obligations of MTDC for purposes of IRC § 103. The IRS has consistently held that the guaranty of an obligation by a governmental unit does not cause the guaranteed obligation to be treated as an obligation of the governmental unit. See Rev. Rul. 77-165, 1977-1 C.B. 21; see also Treas. Reg. § 1.103-1(a).
Conclusion. Interest paid on the Senior Mortgage Loan and the Mezzanine Loan is not exempt from federal income tax under IRC § 103. All lenders — Ironclad Capital Partners, Ridgeline Credit Solutions, Atlas Mutual Assurance, Commonwealth Trust Company, Harborview Capital Group, Meridian Pacific Lending (as senior loan participants), and Granite Peak Capital Management — must treat interest income received on these loans as taxable income for federal income tax purposes.
B. Alternative Analysis — If MTDC Were the Direct Borrower
We have considered the hypothetical scenario in which MTDC, rather than the SPEs, were the direct borrower under the Senior Mortgage Loan and the Mezzanine Loan. Even in that scenario, we do not believe that interest on the loans would qualify for tax-exempt treatment under IRC § 103, for the following reasons:
Registered Form Requirement. IRC § 149(a) provides that, with limited exceptions, interest on a state or local bond is not excluded from gross income under § 103 unless the bond is in registered form. Commercial bank loans are typically not issued in registered form, and the Senior Mortgage Loan and Mezzanine Loan documents as currently drafted do not contemplate issuance in registered form. While it is theoretically possible to structure a bank loan in registered form, doing so would be unusual and would raise a number of practical complications.
Private Activity Bond Limitations. IRC § 141 imposes limitations on the tax-exempt status of "private activity bonds." A bond is a private activity bond if it is part of an issue in which (a) more than 10% of the proceeds are used for any private business use and (b) more than 10% of the payment of principal or interest is directly or indirectly secured by or paid from property used for a private business use. The Project includes approximately 1.2 million square feet of commercial office space and approximately 85,000 square feet of retail space, both of which would constitute private business use. The commercial components of the Project would almost certainly cause the loans to fail the private activity bond tests of IRC § 141, rendering the interest taxable even if the loans were otherwise structured to qualify under § 103.
Volume Cap Limitations. IRC § 146 imposes an annual volume cap on the aggregate amount of private activity bonds that may be issued in each state. Even if the loans could be structured to qualify as exempt-facility bonds or qualified bonds under one of the exceptions to the private activity bond rules, the $475,000,000 Senior Mortgage Loan alone would consume a substantial portion of Illinois's or New York's annual volume cap allocation. We are not aware of any allocation of volume cap having been obtained or requested for this Project.
No Restructuring Recommended. Based on the foregoing, we do not recommend restructuring the transaction to attempt to achieve tax-exempt interest treatment for the Senior Mortgage Loan or the Mezzanine Loan. The practical and legal obstacles are significant, and the costs and complexities of such a restructuring would substantially outweigh any potential benefit to the lenders.
C. Withholding Tax Considerations
Although the interest on the Senior Mortgage Loan and the Mezzanine Loan is taxable, certain withholding tax considerations merit attention if any participant lender or assignee is a non-U.S. person (i.e., a nonresident alien individual, a foreign corporation, a foreign partnership, or a foreign estate or trust).
Portfolio Interest Exemption. Under IRC § 871(h) (for nonresident alien individuals) and IRC § 881(c) (for foreign corporations), interest received by a non-U.S. person on "portfolio debt obligations" is exempt from the 30% withholding tax that would otherwise apply under IRC §§ 871(a) and 881(a). For this exemption to apply, the lender must provide a valid IRS Form W-8BEN or W-8BEN-E certifying its foreign status and eligibility for the exemption, and the interest must not be "effectively connected" with a U.S. trade or business of the lender. Additionally, the 10-percent shareholder rule and the bank interest exceptions must be satisfied. We recommend that the loan documents include appropriate representations and withholding provisions to address these requirements.
FATCA Compliance. The Foreign Account Tax Compliance Act ("FATCA"), codified at IRC §§ 1471–1474, imposes a 30% withholding tax on certain payments made to foreign financial institutions and certain non-financial foreign entities that fail to comply with FATCA reporting requirements. The loan documents should include standard FATCA representations and withholding provisions. We note that the actual payors of interest are HYW Mortgage LLC and HYW Mezzanine LLC, not MTDC; MTDC's status as a government instrumentality does not affect the FATCA withholding obligations of the SPE borrowers.
Coordination with Lender's Counsel. We recommend that Clearfield & Associates (Harrison Whitmore) confirm that the loan documents include appropriate tax withholding provisions, including FATCA representations and gross-up clauses, consistent with market practice for commercial real estate construction loans.
V. New York Mortgage Recording Tax Analysis
A. Statutory Framework — NY Tax Law Article 11 (§§ 250–262)
The New York mortgage recording tax is imposed by Article 11 of the New York Tax Law (§§ 250–262) on the recording of mortgages of real property within the State of New York. The tax is calculated based on the principal debt or obligation secured by the mortgage, and the applicable rates vary depending on the location of the property, the type of property, and the amount of the mortgage.
For commercial property located in New York City, the combined MRT rate is as follows:
The precise combined rate applicable to a commercial mortgage in excess of $500,000 in New York City is approximately 2.80%, comprising the state basic tax of 1.00%, the state additional tax of 0.25%, the NYC additional tax of 1.00%, and an MTA surcharge of 0.25%, plus the NYC additional surcharge of 0.30% for mortgages on property in NYC (the precise calculation depends on the specific components applicable to commercial mortgages, and we have computed the rate applicable to this transaction at approximately 2.80% of principal debt).
Application to Senior Mortgage Loan. For the Senior Mortgage Loan of $475,000,000, if MRT is payable at the full combined rate of approximately 2.80%, the potential MRT liability is approximately $13,300,000 (calculated as $475,000,000 × 0.028 = $13,300,000, subject to de minimis adjustments for the reduced rate on the first $500,000 of principal debt, which are not material at this scale).
This is a substantial closing cost that must be accounted for in the sources-and-uses analysis and that will directly impact the economics of the transaction.
Application to Mezzanine Loan. The Mezzanine Loan of $200,000,000 is secured by a pledge of HYW Mezzanine LLC's membership interests in HYW Mortgage LLC, which is a security interest in personal property under the Uniform Commercial Code, not a mortgage of real property. MRT is imposed only on the recording of mortgages of real property (or interests therein); a UCC security interest in membership interests of a limited liability company does not constitute a mortgage for MRT purposes. Accordingly, MRT is generally not applicable to the Mezzanine Loan.
However, we note a limited caveat: if any component of the Mezzanine Loan collateral is characterized as a direct interest in real property (as opposed to an interest in the entity that holds real property), MRT exposure could arise. The New York DTF and courts have historically drawn a clear distinction between pledges of equity interests and mortgages of real property for MRT purposes, but we recommend that the mezzanine loan documents be drafted carefully to ensure that the collateral is clearly characterized as personal property (membership interests) and not as a real property interest.
B. Government Instrumentality Exemption — NY Tax Law § 252
Section 252 of the New York Tax Law provides an exemption from MRT for mortgages made to or by certain governmental entities. Specifically, § 252 exempts from the MRT any mortgage given by the State of New York, any political subdivision thereof, or any public benefit corporation, and any mortgage given by the United States or any instrumentality thereof. Section 252 also contains a broader provision exempting mortgages given to or by entities that are exempt from taxation by reason of law.
Key Question: Applicability to MTDC. MTDC is a government instrumentality of the State of Illinois, not of the State of New York. Section 252, on its face, exempts mortgages given by the State of New York, its political subdivisions, and its public benefit corporations. It does not explicitly reference instrumentalities of other states. However, the broader language of § 252 — exempting mortgages by entities that are "exempt from taxation by reason of law" — could encompass an Illinois government instrumentality, particularly if MTDC's exempt status is recognized under principles of interstate comity.
The New York DTF has issued advisory opinions addressing the scope of the § 252 exemption. In TSB-A-03(1)R (Jan. 2003), the DTF concluded that a mortgage given by a public authority created by another state was exempt from MRT under § 252, on the theory that the authority was exempt from taxation "by reason of law" (i.e., its enabling legislation and the constitutional doctrine of intergovernmental tax immunity). While the specific facts of that opinion differ from the present case, the principle supports the argument that MTDC's Illinois instrumentality status could be recognized for purposes of the New York MRT exemption.
Key Issue: SPE as Mortgagor. Even if MTDC itself qualifies for the § 252 exemption, the critical issue is whether the exemption extends to HYW Mortgage LLC, the entity that will execute the mortgage as mortgagor. HYW Mortgage LLC is not a government instrumentality; it is a Delaware limited liability company organized under general-purpose entity law. If the mortgage is given solely by HYW Mortgage LLC, the exemption may not apply.
Two theories could support extending the exemption to HYW Mortgage LLC:
Agency Theory. If HYW Mortgage LLC can be characterized as the agent or nominee of MTDC, acting solely on behalf of MTDC in holding and mortgaging the property, then the mortgage could arguably be treated as a mortgage "by" MTDC for purposes of § 252. Under this theory, the form of the transaction (SPE as mortgagor) would be disregarded in favor of the substance (MTDC is the real party in interest and the ultimate beneficiary of the mortgage transaction).
This theory is plausible but faces significant challenges. The SPE separateness covenants imposed by Ironclad and Granite Peak — including requirements that HYW Mortgage LLC maintain separate books and records, hold itself out as a separate entity, refrain from commingling assets with MTDC, maintain at least one independent director (or independent manager) on its governing body, and observe all corporate formalities — are specifically designed to prevent HYW Mortgage LLC from being treated as the alter ego or agent of MTDC. Indeed, the non-consolidation opinions required by the lenders (to be delivered by this Firm and/or special counsel) will opine that HYW Mortgage LLC is a separate legal entity whose assets would not be substantively consolidated with those of MTDC in a bankruptcy or insolvency proceeding.
These separateness requirements and non-consolidation opinions may directly undercut the agency theory for MRT exemption purposes. If HYW Mortgage LLC is maintained as a separate entity for bankruptcy purposes, it is difficult to argue simultaneously that it is merely the agent of MTDC for MRT purposes. This tension is a fundamental structural challenge in the current transaction.
Alter Ego Theory. Alternatively, one might argue that HYW Mortgage LLC is the alter ego of MTDC because MTDC is its sole indirect owner, MTDC controls all of its activities, and HYW Mortgage LLC has no independent business purpose apart from serving as MTDC's vehicle for the Project. This argument is even weaker than the agency theory, given the lender-imposed separateness requirements, and we do not recommend relying on it.
C. Practical Considerations and Risk Assessment
Based on the analysis above, the availability of the MRT exemption for the Senior Mortgage Loan is uncertain under the current transaction structure. The key risk factors are as follows:
Risk of Challenge by NYC Register or DTF. If HYW Mortgage LLC claims an MRT exemption at the time of recording the mortgage, the New York City Register's office may reject the claim or refer it to the DTF for review. The Register's office has been known to apply the § 252 exemption conservatively, particularly in cases involving SPEs that are not themselves governmental entities. A challenge at the time of recording could delay the closing or require payment of the MRT with a subsequent claim for refund.
DTF Advisory Opinion. It would be possible to request an advisory opinion from the DTF on the applicability of the § 252 exemption to the specific facts of this transaction. However, advisory opinions typically take three to six months to process, and in some cases significantly longer. Given the target closing date of June 15, 2025, there is insufficient time to obtain an advisory opinion prior to closing. We note this option for consideration as a post-closing risk mitigation measure, but it is not a practical pre-closing solution.
Alternative Structuring — MTDC as Co-Mortgagor or Direct Mortgagor. The most robust approach to securing the MRT exemption would be to structure the mortgage so that MTDC itself is the mortgagor (or at least a co-mortgagor) of the property. If MTDC is a direct party to the mortgage, the § 252 exemption should apply to the mortgage because it would be given "by" a government instrumentality. Under this approach, HYW Mortgage LLC could still be the borrower under the loan agreement, with obligations to repay the loan, while MTDC would execute the mortgage as the entity granting the security interest in the leasehold.
This approach raises questions that must be discussed with the Real Estate group and with Clearfield & Associates (Harrison Whitmore), counsel to Ironclad. Ironclad may be unwilling to accept MTDC as the mortgagor if doing so creates complications for lender remedies, including foreclosure, appointment of a receiver, and enforcement against the collateral. In particular, if MTDC is a government instrumentality, it may be entitled to sovereign immunity protections that could impede the lender's ability to enforce the mortgage. We recommend that Douglas Fairchild and Grace Nakamura discuss this issue with Harrison Whitmore at the earliest opportunity.
Allocation of MRT Cost. Under the Senior Mortgage Loan Term Sheet dated February 28, 2025, the allocation of closing costs, including MRT, is to be agreed upon in the definitive loan documents. If the exemption is unavailable, the MRT of approximately $13,300,000 on the Senior Mortgage Loan is a material closing cost that will need to be borne by either the Borrower (HYW Mortgage LLC / MTDC) or the Lender (Ironclad). Market practice for commercial construction loans in New York generally places MRT on the borrower, but given the unique circumstances of this transaction, the allocation should be negotiated as part of the definitive documentation.
Impact on Sources and Uses. If the MRT exemption is not available and the borrower bears the $13,300,000 MRT cost, this amount must be funded from the capital stack. It is not clear from the current sources-and-uses analysis whether the $920,000,000 total project cost includes provision for MRT. If it does not, MTDC's equity contribution of $200,000,000 may need to be increased, or an additional source of funding will need to be identified. We recommend that the Real Estate team and MTDC's internal finance group (Priya Subramanian, CFO) confirm the treatment of MRT in the project budget.
Recommendation. We recommend the following course of action with respect to MRT:
1. Structure the mortgage to maximize exemption potential. The preferred approach is for MTDC to serve as co-mortgagor or direct mortgagor, with HYW Mortgage LLC as borrower under the loan agreement only. This structure provides the strongest basis for claiming the § 252 exemption.
2. Discuss the modified structure with Clearfield & Associates (Harrison Whitmore) to determine whether Ironclad will accept MTDC as mortgagor, and if so, what additional protections or modifications to the loan documents may be required.
3. As a fallback, budget for the full MRT of approximately $13,300,000 as a closing cost, and seek the exemption as a potential cost saving. If the exemption is claimed and challenged, the parties should be prepared to pay the MRT and seek a refund through administrative or judicial proceedings.
4. Consider requesting a DTF advisory opinion on the exemption, recognizing that such an opinion is unlikely to be obtained prior to the June 15, 2025 closing date. A post-closing advisory opinion could still be valuable if the exemption is claimed at closing and subsequently challenged.
VI. New York City Real Property Tax Analysis
A. General Taxability of the Project
The Project is located at 450 West 34th Street, in the Borough of Manhattan, City of New York (Block 729, Lots 1, 5, 12, and 15). For New York City real property tax purposes, the Project will be classified as Class 4 commercial property. The current Class 4 tax rate for the 2024–2025 fiscal year is approximately 10.684% of assessed value (which for Class 4 property is 45% of market value). At full valuation, the annual real property tax burden on a $1,025,000,000 property could be substantial — potentially in the range of $40,000,000 to $50,000,000 per year, depending on the assessed value assigned by the NYC Department of Finance.
However, the real property tax analysis for the Project is complicated by the ownership structure of the underlying land. The Project site is owned in fee by the City of New York (through NYCEDC), and the Ground Lease was executed on June 1, 2020, granting MTDC a long-term leasehold interest in the property. Because the fee interest is held by the City, the fee interest itself is exempt from real property tax. The question is whether the leasehold interest and the improvements to be constructed thereon are taxable, and if so, whether any exemptions or abatements apply.
Under New York City Department of Finance practice, a leasehold interest in City-owned property may be treated as taxable to the lessee if the property is used for private or commercial purposes. The improvements constructed by the lessee are generally taxable unless a specific exemption applies or a PILOT agreement has been negotiated.
B. Exemption under RPTL § 404 — Government Property
Section 404(1) of the New York Real Property Tax Law provides that real property owned by the United States, the State of New York, or any public corporation shall be exempt from taxation. The term "public corporation" is defined in the New York General Construction Law § 66 to include a municipal corporation or a district corporation, as well as a public benefit corporation. RPTL § 404 is the primary basis for the exemption of government-owned property from real property tax in New York.
Applicability to MTDC. The threshold question is whether MTDC qualifies as a "public corporation" under RPTL § 404. MTDC is not a New York public benefit corporation — it is an Illinois government instrumentality. The term "public corporation" as used in RPTL § 404 is defined with reference to New York law and does not, on its face, encompass entities created by other states. While principles of interstate comity might support an argument that an out-of-state government instrumentality should be treated as the equivalent of a New York public corporation for this purpose, we are not aware of any authority directly on point.
Applicability to HYW Mortgage LLC. Even if MTDC itself could claim an exemption under RPTL § 404, HYW Mortgage LLC — as the holder of the leasehold interest and the entity constructing the improvements — is a Delaware limited liability company and is not a "public corporation" under any definition. If HYW Mortgage LLC is the entity of record holding the leasehold, the § 404 exemption is unlikely to apply.
We note that the Ground Lease was executed between NYCEDC (as landlord) and MTDC (as tenant). If the leasehold has been or will be assigned to HYW Mortgage LLC, the entity holding the leasehold for tax assessment purposes would be HYW Mortgage LLC, not MTDC. The terms of the Ground Lease and any required consent to assignment should be reviewed to confirm the identity of the leasehold tenant of record.
Conclusion. A blanket exemption under RPTL § 404 is unlikely to be available for the Project, particularly if the leasehold is held by HYW Mortgage LLC rather than MTDC directly, and given the mixed-use character of the Project (which includes substantial commercial components that do not serve a traditional governmental purpose).
C. Exemption under RPTL § 412-a — Transit Facilities
Section 412-a of the RPTL provides an exemption from real property tax for property owned by or used for the purposes of public transit or transportation. This section was enacted to promote the development and maintenance of transit infrastructure and facilities.
Applicability to the Project. The Project includes approximately 45,000 square feet of public transit infrastructure improvements, including a below-grade connection to the No. 7 subway line extension at the 34th Street–Hudson Yards station and improvements to bus transit facilities along 34th Street. These transit-related components are directly related to the public transit purpose and may qualify for exemption under § 412-a.
However, the transit components represent only a small fraction of the overall Project (approximately 45,000 square feet out of a total of approximately 1,330,000 square feet, or roughly 3.4%). The overwhelming majority of the Project consists of commercial office space (approximately 1,200,000 square feet) and retail space (approximately 85,000 square feet), which are commercial uses that do not qualify for the transit facilities exemption.
Allocation Between Exempt and Taxable Components. If the § 412-a exemption is claimed, it would likely apply only to the transit-related portions of the Project. An allocation of the assessed value between the exempt transit components and the taxable commercial components would be required. The NYC Department of Finance would need to determine the appropriate allocation methodology, which could be based on square footage, construction cost, or other factors.
NYC Transit Infrastructure Grant. The $45,000,000 NYC Transit Infrastructure Grant is specifically designated for the transit components of the Project. The existence of this grant supports the argument that the transit components serve a distinct public transit purpose and should be eligible for a separate tax treatment. However, the grant itself does not automatically confer tax-exempt status on the transit components.
Conclusion. The § 412-a exemption may be available for the transit-related components of the Project, but it would not extend to the commercial office and retail components. A full exemption for the entire Project under § 412-a is not available.
D. Payment in Lieu of Taxes (PILOT) Structure
Given the limitations of the RPTL § 404 and § 412-a exemptions, the most likely real property tax treatment for the Project is a Payment in Lieu of Taxes ("PILOT") arrangement negotiated between MTDC and NYCEDC (on behalf of the City of New York).
Standard NYCEDC PILOT Structure. NYCEDC commonly enters into PILOT agreements with lessees of City-owned property in connection with development projects. Under a typical PILOT structure, the lessee makes annual payments to the City in lieu of full real property taxes. The PILOT payments are generally set at a level below the full tax that would otherwise be payable, with the abatement reflecting the public purpose served by the project (in this case, transit-oriented development) and the economic development benefits generated by the project.
PILOT payments typically escalate over time, often starting at a significantly reduced level during the construction period and ramping up to a stabilized level that may be a negotiated percentage of full taxes. The terms of the PILOT are set forth in a PILOT Agreement, which is a binding contract between the City (through NYCEDC or another City agency) and the lessee.
Ground Lease Provisions. The Ground Lease between NYCEDC and MTDC, executed on June 1, 2020, likely contains provisions regarding real property taxes and PILOT obligations. We recommend that the Real Estate team review the Ground Lease to confirm whether a PILOT obligation is already established or whether the Ground Lease contemplates negotiation of a PILOT at a later date (e.g., upon commencement of construction or upon stabilization).
Interaction with Lender Requirements. Both Ironclad and Granite Peak will require that PILOT payments be treated as an operating expense of the Project for purposes of calculating NOI, DSCR, and debt yield. The Senior Mortgage Loan Term Sheet requires a minimum combined DSCR of 1.20x and a minimum debt yield of 8.0%, calculated after deduction of all operating expenses, including real property taxes or PILOT payments. The level of the PILOT will therefore have a direct impact on the financial covenants and the viability of the loan.
Additionally, the lenders will require that PILOT payments be included in the cash flow waterfall and that adequate reserves be maintained for PILOT obligations. The PILOT Agreement itself may need to be approved by the lenders, and the lenders may require a subordination, non-disturbance, and attornment agreement ("SNDA") with NYCEDC to protect their interests in the event of a default under the Ground Lease or the PILOT Agreement.
PILOT Negotiation Status. We understand from preliminary discussions with Marcus Jennings (MTDC Vice President, Real Estate Development) and Connor McBride (Project Director) that PILOT negotiations with NYCEDC are ongoing but that no final term sheet or agreement has been executed. We recommend that the Real Estate team request a current PILOT term sheet or summary from NYCEDC and/or Connor McBride as soon as practicable, as the PILOT terms will affect the loan underwriting and the financial models.
E. Impact on Underwriting and Loan Covenants
The real property tax treatment of the Project — whether full taxes, PILOT, or partial exemption — will have a significant impact on the underwriting of the Senior Mortgage Loan and the Mezzanine Loan. The key metrics affected are as follows:
Net Operating Income. The projected stabilized NOI of $58,200,000 per year is based on certain assumptions regarding real property tax or PILOT payments. If these assumptions are incorrect — for example, if the PILOT is higher than assumed or if full taxes are payable — the actual NOI could be materially lower than projected.
Debt Service Coverage Ratio. The combined DSCR covenant requires a minimum of 1.20x, calculated as NOI divided by combined annual debt service on the Senior Mortgage Loan and the Mezzanine Loan. A reduction in NOI resulting from higher-than-expected real property tax or PILOT payments would directly reduce the DSCR and could cause a covenant violation.
Debt Yield. The debt yield covenant requires a minimum of 8.0%, calculated as NOI divided by the combined outstanding loan balance ($675,000,000). A reduction in NOI from $58,200,000 to below $54,000,000 (approximately) would cause the debt yield to fall below 8.0%.
Loan-to-Value Ratio. The maximum combined LTV covenant is 70.0%, calculated as the combined outstanding loan balance divided by the appraised value of the Project. The Broadstreet Appraisal (Report No. BAG-25-1092, dated April 1, 2025) concluded to an as-stabilized appraised value of $1,025,000,000, yielding a combined LTV of approximately 65.9% ($675,000,000 / $1,025,000,000). However, the appraised value may have been predicated on specific assumptions regarding real property tax or PILOT payments. If the actual tax burden is higher than assumed in the appraisal, the appraised value could be lower, potentially causing an LTV covenant violation.
Recommendation. We recommend that the Real Estate team confirm the specific real property tax or PILOT assumptions used in the Broadstreet Appraisal (by contacting Marcus Tolliver, MAI, the appraiser of record) and in the borrower's operating projections. If the assumptions differ from the expected PILOT terms, the financial models and covenant calculations should be adjusted accordingly. A detailed sensitivity analysis is provided in Appendix C to this memorandum.
VII. Transfer Tax Considerations
A. New York State Real Estate Transfer Tax (RETT)
The New York State Real Estate Transfer Tax ("RETT") is imposed under Article 31 of the New York Tax Law (§§ 1400–1412) on the conveyance of real property or interests therein within the State of New York. The RETT rate is $2.00 per $500 of consideration (0.4%), with an additional "mansion tax" surcharge applicable to residential property.
Ground Lease Conveyance — Already Completed. The execution and delivery of the Ground Lease on June 1, 2020, constituted a conveyance of a leasehold interest in real property for RETT purposes. Pursuant to Tax Law § 1401(e), a conveyance includes the creation of a leasehold interest in real property for a term of 49 years or more (including renewal options). The Ground Lease between NYCEDC and MTDC is understood to be a long-term lease that exceeds this threshold. We assume that RETT was paid (or that an exemption was properly claimed) at the time the Ground Lease was recorded in June 2020 (CRFN 2020000198762). We recommend confirming this assumption as part of the diligence process.
Transfer of Controlling Interests in the SPEs. Tax Law § 1401(e) also defines "conveyance" to include the transfer or acquisition of a "controlling interest" in an entity that owns real property in New York. A "controlling interest" means, in the case of a limited liability company, 50% or more of the capital, profits, or beneficial interest. Any future transfer of MTDC's membership interests in HYW Mezzanine LLC or HYW Mortgage LLC (whether through a sale, restructuring, joint venture, or other disposition) could constitute a "controlling interest" transfer subject to RETT.
At the present time, there is no transfer of controlling interests contemplated in connection with the financing. However, the parties should be aware of this potential RETT exposure in connection with any future sale, refinancing, or restructuring of the Project.
Government Instrumentality Exemption. Tax Law § 1405(b)(1) provides an exemption from RETT for conveyances to or from the United States, the State of New York, or any of their instrumentalities, agencies, or political subdivisions. As with the MRT exemption under § 252, the key question is whether this exemption extends to MTDC as an Illinois government instrumentality and, if so, whether it extends to the Delaware SPEs.
The analysis is similar to the MRT exemption analysis in Section V.B above. MTDC itself may qualify for the § 1405(b)(1) exemption under principles of interstate comity, but the exemption may not extend to the SPEs. For current purposes, this issue is academic because no RETT-triggering conveyance is contemplated in connection with the financing. However, if a future transfer or restructuring is considered, the RETT exemption should be analyzed in detail.
B. NYC Real Property Transfer Tax (RPTT)
The New York City Real Property Transfer Tax ("RPTT") is imposed under Chapter 21 of the NYC Administrative Code (§§ 11-2101 through 11-2114) on the conveyance of real property or economic interests therein within the City of New York. The RPTT is imposed in addition to the State RETT. For commercial property, the RPTT rate is 1.425% of consideration for transfers where the consideration exceeds $500,000.
Exemption for Government Entities. NYC Administrative Code § 11-2106 provides an exemption from RPTT for conveyances to or from the United States, the State of New York, the City of New York, or any of their instrumentalities, agencies, or political subdivisions. The scope of this exemption is similar to the RETT exemption under Tax Law § 1405(b)(1), and the same analytical issues apply regarding MTDC's status as an out-of-state instrumentality and the treatment of its Delaware SPEs.
Current Exposure. No RPTT-triggering event is contemplated in connection with the current financing. The Ground Lease conveyance was completed in June 2020, and any RPTT obligation arising from that conveyance was either paid or exempted at that time. However, as with RETT, any future transfer of controlling interests in the SPEs would need to be analyzed for RPTT purposes.
Conclusion. There is no current RETT or RPTT exposure in connection with the financing. Future transfers of controlling interests in HYW Mortgage LLC or HYW Mezzanine LLC would require separate analysis under both RETT and RPTT, and the availability of the government instrumentality exemption would depend on the specific structure and circumstances of any such transfer.
VIII. Federal Tax-Exempt Entity Considerations
A. MTDC's Federal Tax-Exempt Status under IRC § 115
As discussed in Section III.B above, MTDC's income from the exercise of essential governmental functions is excluded from gross income under IRC § 115(1). This exclusion extends to income earned by MTDC through its

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