Taxes are least beloved by those who pay them. This may be especially true when a tax is paid by a smaller portion of the population while its benefits extend to everyone. By those criteria, the seven-year-old Peconic Bay Community Preservation Funds (the "Fund" or "Funds") should be unpopular, at least among purchasers of real estate in the five East End Towns: East Hampton, Riverhead, Shelter Island, Southampton, and Southold. The purpose of each Town's Fund is to combat overdevelopment by protecting the ecological health and unique character of each East End community-surely a cause with broad appeal. But each Fund draws all of its financial resources from a 2% transfer tax imposed solely on purchasers of real estate in each of the Towns. Nonetheless, despite initial claims of inequity and worry about the effects such a tax could have on the real estate industry, the Funds continue to enjoy widespread support.
One thing that sets the Funds apart from other tax-driven revenue schemes is the direct and repeated approval given the tax by residents. Governor Pataki signed the Peconic Bay Community Preservation Fund Act into law in June of 1998. The Act itself did not establish the Funds or impose any tax. Instead, it merely authorized each Town to submit the issue to voters by referendum. In November of 1998, a measure was placed on the ballot in all five Towns, and voters overwhelmingly approved it. Indeed, in 2002 East End residents voted in all five Towns, by a 2-1 margin, to extend the Fund and its accompanying tax for another ten years, shifting its expiration date from 2010 to 2020.
Each Town's fund was not only put into place by residents, but is managed locally as well. The law gives broad discretion to the Towns when it comes to deciding how to deploy the monies in the Funds. Each Town, acting on the advice of a volunteer Preservation Committee has used the fund differently, according to its size and needs.
Examples of specific Fund-driven preservation efforts include East Hampton's proposal to purchase and preserve Dayton Island as open space. Development of Dayton Island would arguably downgrade the views and sense of openness enjoyed by residents in the Sammis Beach area. Furthermore, Southold Fund resources have contributed to the realization of a comprehensive plan established at the inception of the Fund in 1999 to preserve much of its farmland, which is vitally important to the preservation of Southold's character and to its continued growth as an internationally renowned wine region. Similarly, much of Riverhead's Fund is devoted to the preservation of farmland, but the recent acquisition of 33 open space acres near Fresh Pond Hill is notable particularly since the Town got the land at a price more in line with buying development rights than a complete purchase. In 2002 the Town of Southampton, using Fund resources, and the Nature Conservancy
worked together to purchase 40 acres of pristine wetlands near Bullshead Bay. Shelter Island has used its fund to preserve, among other things, over 700 feet of that island's famous Crescent Beach.
These examples only scratch the surface, though: together the Towns have preserved, with Fund resources, well over 5000 acres through more than 300 acquisitions. The above table breaks down Fund use since inception by Town.
The amounts above are approximate as monies continue to come in and out of the Funds on a daily basis. They also do not reflect the Towns' ability to blend Community Preservation Fund spending with other resources, such as Suffolk County funds, municipal bond proceeds, and non-governmental agency preservation efforts. Nonetheless, the majority of Town preservation efforts are funded by the Fund.
All real estate transfers are subject to the Fund's 2% tax. Thus it applies not only to the outright sale of a property, but also, for instance, to leases. However, the value of less-than-entire interests such as leases will often fall within the exemptions described below, thereby allowing such transfers to occur without Fund taxation. When the value of the interest transferred does rise above the maximum exemption level, the 2% tax is levied on the value of the interest being transferred less any applicable exemptions.
There are, broadly speaking, four types of exemptions from the tax. First, transactions with local, state, and federal government entities, along with those of the UN and Canada, are entirely exempt. Second, gifts and transfers for reasons other than occupancy (i.e. mortgages, options to purchase, tax sales, and bankruptcy sales) are mostly exempt. Third, transfers of protected land that will remain, after the transfer, legally protected as open space or bound to agricultural use are not subject to the 2% tax. Finally, all transfers are exempt up to a certain amount. This amount is based on the town in which the transfer takes place. In Southold and Riverhead, improved properties are exempt up to $150,000 and unimproved properties are exempt up to $75,000 while in Shelter Island, East Hampton and Southampton, improved properties are exempt up to $250,000 and unimproved land up to $100,000.
It should come as no surprise that the vast majority of sales in the region involve amounts greater than the applicable exemptions. For example, if the purchase price of a house in Amagansett is $2,000,000, the tax is levied on $1,750,000, which is the $2 million purchase price less the $250,000 exemption. The resulting tax is $35,000 (2% of $1,750,000).
The tax is due and payable like the general New York State real estate transfer tax no later than 15 days after closing. However, unlike the general New York State transfer tax, though, the Fund requires the purchaser, rather than the seller, to pay the 2% tax. But if the purchaser doesn't pay the tax, then the Town can seek payment of the tax from the seller. Ultimately this means that purchasers and sellers are jointly and severally liable for payment of the tax. Accordingly, responsibility for payment of the tax should be clearly spelled out in any East End real estate contract and payment should be made at closing.
Of course the Fund is not without its detractors. The New York State Association of Realtors (or "NYSAR") wrote a letter in June of 1998 to Governor Pataki's office urging a veto. In that letter, NYSAR said that the 2% transfer tax unfairly burdened real estate transactions, thereby threatening the health of the industry. NYSAR's letter further argued that a sales tax would be fairer. Since current residents and visitors to the East End benefit from the preservation of open space, NYSAR said, they should share the economic burden. But perhaps the most important objection, from NYSAR's perspective, was that the passage of such measures in the East End would set a precedent, causing community preservation funds financed by real estate transfer taxes to appear all over New York State. To some extent, they were right. A bill-modeled directly after the Peconic Bay Community Preservation Fund-was introduced by the Governor just this past May. If such a bill passed, it would authorize all New York towns to hold referenda allowing voters to decide whether to implement a 2% transfer tax.
Despite NYSAR's concerns about the potential damping effects widespread use of Community Preservation Funds might have on the statewide real estate industry, the East End experience of the past 7 years has shown that such funds can be enormously successful. Perhaps the Fund's proven ability to preserve open space overcomes any concerns purchasers may have about additional costs. Perhaps also, the Fund, tax and all, fosters the very sense of community it seeks to preserve. Purchasers on the East End are buying into not only a beautiful, unique setting, but are also buying into a commitment to the preservation of that setting. Indeed, the Fund may be a wonderfully effective means to ensure sustainable health of the real estate industry. Record-setting deals continue to take place while the Towns-with the full support of their voters-are using their Community Preservation Funds judiciously and creatively to ensure the continued existence of the East End as we know it.
The Real Estate Legal News article is being reprinted with permission from Mark L. Beigelman P.C. This article is being provided for general informational purposes only and should not be construed as legal advice. You should speak with your own attorney regarding any specific questions or legal issues you may have.