                       107 T.C. No. 7



                UNITED STATES TAX COURT



 REPUBLIC PLAZA PROPERTIES PARTNERSHIP, PFI REPUBLIC
   LIMITED, INC., TAX MATTERS PARTNER, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 23300-94.                    Filed September 16, 1996.



     Company A (A) sold Company B (B) a 35-percent
interest, and retained a 65-percent interest, in a
commercial office building (building) that was subject
to an existing loan (loan) made by Company C (Lender).
A and B contributed their respective interests in the
building to Partnership P (P) that was formed by A and
B pursuant to a partnership agreement (partnership
agreement), and P assumed the loan. Pursuant to a
lease, P leased A the building, which was approximately
29 percent vacant, for a term of 24 years and 11.5
months. Except for a small amount of space, A was not
to occupy the building, but instead was to sublease it.
The lease required A to pay P rent in the amounts and
on the dates specified in a schedule contained in the
lease (rent payment schedule) that took into account,
inter alia, the requirements of Lender with respect to
servicing the loan. The lease and the rent payment
schedule allocated the rental payments for the entire
                              - 2 -


     lease term, providing that the amount of rent to be
     paid by A for the first 11.5 months of the lease term
     was zero (11.5-month period of zero rent) and spec-
     ifying the amounts and due dates of the rent to be paid
     by A over the 24 years of the lease term following that
     11.5-month period. The agreement under which A sold B
     a 35-percent interest in the building required, inter
     alia, that P deliver to Lender a letter of credit
     naming Lender as beneficiary (Lender letter of credit)
     in order to secure P's obligations under the loan and
     that A deliver to P a letter of credit naming P as
     beneficiary (P letter of credit) in order to secure P's
     obligations under the Lender letter of credit. In
     order to service the loan during the 11.5-month period
     of zero rent, A and B agreed in the partnership agree-
     ment to make additional capital contributions to P on
     the first day of each month during the last 11 months
     of that period.
          Respondent concedes that if the Court were to find
     that the 11.5-month period of zero rent qualifies as a
     reasonable rent holiday described in sec. 467(b)(5)(C),
     I.R.C.,1 P would be entitled for 1988 to accrue rent
     under the lease pursuant to the terms of the lease
     (respondent's concession).
          Held: The 11.5-month period of zero rent quali-
     fies as a reasonable rent holiday described in sec.
     467(b)(5)(C). Accordingly, pursuant to respondent's
     concession, P shall accrue rent for 1988 in accordance
     with the lease as provided in sec. 467(b)(1)(A).
          Held, further: The lease did not allocate rent to
     the 11.5-month period of zero rent in an amount equal
     to the P letter of credit, and P is not required for
     1988 to accrue as rent the amount of that letter of
     credit.



     Clark Reed Nichols and Cheryl A. Chevis, for petitioner.

     Gerald W. Douglas, for respondent.




1
   All section references are to the Internal Revenue Code (Code)
in effect for 1988. All Rule references are to the Tax Court
Rules of Practice and Procedure.
                               - 3 -


     CHIECHI, Judge:   In the notice of final partnership adminis-

trative adjustment (FPAA), respondent determined adjustments to

the Form 1065 (Federal partnership return) that Republic Plaza

Properties Partnership (Partnership) filed for 1988.

     The issues remaining for decision are:

     (1) Is the 11.5-month period of zero rent at the beginning

of the lease (lease agreement) of an office building by Partner-

ship to BCE Development Properties, Inc. (BCE) a reasonable rent

holiday described in section 467(b)(5)(C)?    We hold that it is.

     (2) Did the lease agreement provide that the amount of a

letter of credit (viz, $8,872,245), which at the request of BCE

was issued in favor of Partnership, is rent that is allocated to

the first 11.5 months of that agreement so that Partnership is

required for 1988 to accrue as rent the amount of that letter of

credit?   We hold that the lease agreement does not so provide and

that Partnership is not required to accrue that amount as rent

for 1988.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     PFI Republic Limited, Inc. (PFI) is the tax matters partner

for Partnership.   At the time the petition was filed, Partner-

ship's principal place of business was in Portland, Oregon.

     In 1987, Commercial Union Capital Corporation (Commercial

Union), an investment banker employed by BCE, approached PFI
                               - 4 -


concerning PFI's interest in investing in a sale-leaseback trans-

action involving a 56-story office building located in the

central business district of Denver, Colorado, that was known and

is herein referred to as Republic Plaza.   During all relevant

periods, PFI and BCE were unrelated companies that, prior to

1987, had no business dealings with each other.   The investment

that Commercial Union initially proposed to PFI involved a lease

of Republic Plaza to BCE for a period of 26 to 28 years, which

was to include a rent holiday2 of approximately 1 year that was

to occur at the beginning of the lease term.

     During the course of its investigation of the investment

proposed by Commercial Union, PFI employed Marshall and Stevens

Incorporated (Marshall and Stevens) to prepare an appraisal

report (Marshall and Stevens appraisal report).   Merle E. Atkins

(Mr. Atkins) and John H. Whitcomb (Mr. Whitcomb), who are quali-

fied as experts in the area of real estate appraisal, prepared

that report.   PFI relied on the Marshall and Stevens appraisal

report in evaluating its proposed investment in Republic Plaza,

including, inter alia, the reasonableness of the rent holiday

included as part of that investment.

     On June 14, 1988, Partnership was formed pursuant to a

partnership agreement entered into between BCE and PFI (partner-


2
   As used herein, the term "rent holiday" means a period of zero
or reduced rent occurring at the beginning of a lease.
                                - 5 -


ship agreement).    During all relevant periods, Partnership, a

general partnership governed by the laws of Colorado, maintained

its books and records and filed its Forms 1065 on a calendar year

basis using the accrual method of accounting.

     In connection with the formation of Partnership, a series of

interrelated events occurred.    Contemporaneous with the formation

of Partnership, on June 14, 1988, pursuant to a written purchase

agreement (purchase agreement), PFI purchased an undivided 35-

percent interest in Republic Plaza from BCE, whereupon BCE owned

a 65-percent undivided interest therein.

     Immediately thereafter, also on June 14, 1988, PFI and BCE

contributed their respective interests in Republic Plaza to

Partnership.   Partnership took ownership of Republic Plaza

subject to a promissory note, dated April 30, 1986, that obli-

gated BCE to pay $200 million to Teachers Insurance and Annuity

Association (TIAA).    Pursuant to an agreement between TIAA and

Partnership that was entered into as of June 14, 1988, that note

was restructured.    Effective June 17, 1988, as restructured,

Partnership became the obligor under the promissory note issued

to TIAA (TIAA term loan), the outstanding principal balance of

that note was reduced to $177,766,184, the maturity date of that

note was changed to May 1, 2011, and that note required monthly

payments of varying amounts of principal and interest over the

term of the loan until it matured on May 1, 2011.
                               - 6 -


     Pursuant to the lease agreement dated June 14, 1988, Part-

nership leased Republic Plaza to BCE for a fixed term that

commenced on June 17, 1988, and ends at midnight on June 1, 2013

(lease term), unless extended at the option of BCE, the lessee.

At the time Partnership and BCE entered into the lease agreement,

tenants occupied approximately 71 percent of Republic Plaza

pursuant to existing leases, and approximately 29 percent of that

office building was vacant.   Pursuant to the lease agreement, BCE

became the sublessor with respect to those existing tenants and

was given the right to receive rent from them.

     In order to satisfy the requirements of TIAA, the mortgagor

of Republic Plaza, the lease agreement required monthly payments

of rent that were to (1) start on July 1, 1989, and terminate on

May 1, 2011, (2) be at least equal to the amounts required to pay

the monthly debt service on the TIAA term loan, and (3) be used

first to satisfy Partnership's obligations under that loan.

Starting on June 1, 2011, after the TIAA term loan was to have

been paid in full, the lease agreement required an annual payment

of rent for each of the last 2 years of the lease term.   In order

to service the TIAA term loan during the initial lease period of

approximately 11.5 months that began on June 17, 1988, and ended

on May 31, 1989, during which the rent to be paid according to

the lease agreement was zero (11.5-month period of zero rent),

BCE and PFI agreed in the partnership agreement to make total
                               - 7 -


additional capital contributions to Partnership on the first day

of each month during the period July 1, 1988, through June 1,

1989, in the amount of approximately $1,759,144.

     The amounts and due dates of rent payable under the lease

agreement that were not required by TIAA in order to service the

TIAA term loan were developed through the use of a computer

program that took into consideration certain requirements of the

lessor and the lessee.   Those requirements included (1) creating

a schedule for the payment of rent that took account of projected

increases in rent in the Denver market for office space (Denver

office market) and that not only provided a certain yield for the

lessor and its partners3 but also minimized the cost to the

lessee and (2) structuring the total amount of rent to be paid

during each of the 24-annual lease periods that start on June 1

and end on May 31 (annual lease period) following the 11.5-month

period of zero rent (including the amount of rent to be paid

monthly to service the TIAA term loan) so that such total amount

during each such period was always within 90 percent to 110

percent of the average annual amount of the aggregate rent that


3
   PFI entered into the sale-leaseback transaction involving Re-
public Plaza in order to make a profit. At the time PFI was de-
termining the profit that it expected to realize from that trans-
action, it anticipated that it would (1) pay Federal and State
income taxes at the highest marginal rate throughout the lease
term, (2) realize $205 million of pretax profit, and (3) pay in
the aggregate approximately $75 million in income taxes over the
lease term.
                               - 8 -


was to be paid over those 24 years of the lease term.

     Taking into account the foregoing considerations involving

the requirements of the TIAA term loan, Partnership, PFI, and

BCE, the lease agreement contained the following provisions with

respect to the amounts and due dates of the rent to be paid under

that agreement.   It required BCE to pay Partnership "net basic

rent" (basic rent) in arrears on each installment date throughout

the lease term "in an amount equal to the sum of the Basic Rent

Portions for all Partners."4   Schedule E of the lease agreement

set forth a schedule (rent payment schedule) that allocated the

basic rent to be paid by BCE for the entire lease term, providing

the amounts of basic rent to be paid and the due dates for the

payment of such rent.   Pursuant to the lease agreement and the

rent payment schedule, (1) for the initial lease period of

approximately 11.5 months that began on June 17, 1988, and ended

on May 31, 1989, the amount of basic rent to be paid by BCE was

zero; and (2) for each of the 24-annual lease periods thereafter


4
   The lease agreement provided that "For any Installment Date,
the 'Basic Rent Portion' for any Partner shall mean the product
of (i) said Partner's percentage interest in the Lessor as speci-
fied on Schedule E, times (ii) the percent figure for such Part-
ner set forth opposite said Installment Date, times (iii) Les-
sor's Cost as specified on Schedule E." The lease agreement
defined the term "installment date" for purposes of the payment
of the basic rent to mean July 1, 1989, and the first day of each
month thereafter throughout the lease term. For all other
purposes, the lease agreement defined that term to mean July 1,
1988, and the first day of each month thereafter during the lease
term.
                                         - 9 -


that start on June 1 and end on May 31, the total amount of basic

rent to be paid by BCE was as follows:5

                                                         Total Amount of
                 Annual Lease Period                  Basic Rental Payments

     June   1,   1989,   through   May   31,   1990     $27,185,083.85
     June   1,   1990,   through   May   31,   1991      27,185,083.85
     June   1,   1991,   through   May   31,   1992      27,185,083.85
     June   1,   1992,   through   May   31,   1993      27,185,083.85
     June   1,   1993,   through   May   31,   1994      27,185,083.85
     June   1,   1994,   through   May   31,   1995      27,185,083.85
     June   1,   1995,   through   May   31,   1996      27,185,083.85
     June   1,   1996,   through   May   31,   1997      27,185,083.85
     June   1,   1997,   through   May   31,   1998      27,185,083.85
     June   1,   1998,   through   May   31,   1999      27,185,083.85
     June   1,   1999,   through   May   31,   2000      27,185,083.85
     June   1,   2000,   through   May   31,   2001      33,226,213.70
     June   1,   2001,   through   May   31,   2002      33,226,213.70
     June   1,   2002,   through   May   31,   2003      33,226,213.70
     June   1,   2003,   through   May   31,   2004      33,226,213.70
     June   1,   2004,   through   May   31,   2005      33,226,213.70
     June   1,   2005,   through   May   31,   2006      33,226,213.70
     June   1,   2006,   through   May   31,   2007      33,226,213.70
     June   1,   2007,   through   May   31,   2008      33,226,213.70
     June   1,   2008,   through   May   31,   2009      33,226,213.70
     June   1,   2009,   through   May   31,   2010      33,226,213.70
     June   1,   2010,   through   May   31,   2011      33,226,213.70
     June   1,   2011,   through   May   31,   2012      33,226,213.70
     June   1,   2012,   through   May   31,   2013      27,185,083.85

     For each of the 22-annual lease periods immediately follow-

ing the 11.5-month period of zero rent, the rent payment schedule


5
   One of petitioner's exhibits that purported to show that the
rent payment schedule complied with the standards established by
Rev. Proc. 75-21, 1975-1 C.B. 715, indicated that the total
amount of basic rent to be paid for each of the 24-annual lease
periods following the 11.5-month period of zero rent was slightly
greater than the total amount of basic rent to be paid for each
such period that we have calculated in accordance with Schedule
E. Although it is unclear from the record why these minimal
discrepancies exist, they do not affect our findings or conclu-
sions herein.
                              - 10 -


required monthly payments on the first day of each month of the

amount of basic rent specified in that schedule.   For each of

those periods, the rent payment schedule required a monthly

payment on February 1 of the basic rent specified in that sched-

ule that was significantly larger than the monthly payments

required on the first day of the other 11 months of each such

period.6   For each of the last two annual lease periods of the

lease term, the rent payment schedule required an annual payment

6
   For most of the 22-annual lease periods immediately following
the 11.5-month period of zero rent, the rent payment schedule
required equal monthly payments of the basic rent specified in
that schedule for all months throughout each such period except
February. To illustrate, for the annual lease period that began
on June 1, 1989, and ended on May 31, 1990, the lessee was
required to remit the basic rent for that period, payable in
arrears, by paying (1) $1,761,894.98 on July 1, 1989, and on the
first day of each month thereafter except February and
(2) $7,804,239.91 on Feb. 1, 1990. However, for each of certain
of those 22-annual lease periods (viz, those annual lease periods
during which the monthly payments due under the TIAA term loan
were to change pursuant to the terms of that loan), the rent
payment schedule required for each such lease period (1) equal
monthly payments of the basic rent specified therein on July 1
and on the first day of each month thereafter through January,
(2) a monthly payment of basic rent in a significantly larger
amount on February 1, and (3) equal monthly payments of the basic
rent specified therein on March 1 and on the first day of each
month thereafter through June. The monthly payments due under
the TIAA term loan were to change as of Feb. 1, 1993, Feb. 1,
1998, and Mar. 1, 2003, and, consequently, the monthly payments
of the basic rent specified in the rent payment schedule were to
change as of those dates. To illustrate, for the annual lease
period that began on June 1, 1992, and ended on May 31, 1993, the
lessee was required to remit the basic rent for that period,
payable in arrears, by paying (1) $1,761,894.98 on July 1, 1992,
and on the first day of each month thereafter through Jan. 1,
1993, (2) $7,689,721.21 on Feb. 1, 1993, and (3) $1,790,524.66 on
Mar. 1, 1993, and on the first day of each month thereafter
through June 1, 1993.
                              - 11 -


on February 1 of the basic rent specified in that schedule for

each such period.

     Pursuant to the rent payment schedule in the lease agree-

ment, the total amount of basic rental payments specified in that

schedule (1) remained constant at $27,185,083.85 for each of the

11-annual lease periods immediately following the 11.5-month

period of zero rent, (2) increased to $33,226,213.70 for each of

the succeeding 12-annual lease periods, and (3) returned to

$27,185,083.85 for the final annual lease period.   The total rent

to be paid during each of the 24-annual lease periods following

the 11.5-month period of zero rent was not greater than 10

percent above or 10 percent below the average annual amount of

the aggregate basic rent that was to be paid over those 24 years

of the lease term.

     On June 17, 1988, BCE, as lessee under the lease agreement,

began immediate economic use of Republic Plaza.   Except for a

relatively small amount of space used by BCE for its operations

as sublessor of Republic Plaza, at no time during any relevant

period did BCE occupy the space it leased in that building under

the lease agreement.   BCE, as lessee, was required to pay the

basic rent in the amounts and on the dates specified in the lease

agreement and the rent payment schedule.   BCE, and not Partner-

ship, assumed the risk of subleasing the approximately 29 percent

of Republic Plaza that was vacant at the time Partnership and BCE
                              - 12 -


entered in that agreement as well as any space that became vacant

when existing leases expired or tenants defaulted under their

leases.

     The Marshall and Stevens appraisal report on which PFI

relied in evaluating, inter alia, the reasonableness of the 11.5-

month period of zero rent provided by the lease agreement con-

tained discussions of various matters, including the condition of

the Denver office market at the time the lease agreement was

executed, the practice in that market of granting rent holidays

and other lease concessions in order to attract lessees, and

specific situations in that market in which the lessors of

commercial office buildings had granted periods of free rent and

other lease concessions to lessees.    At the time Partnership and

BCE entered into the lease agreement, Partnership and its part-

ners PFI and BCE were aware of, inter alia, those matters.

     At the time the lease agreement was executed in June 1988,

the Denver office market was suffering the aftereffects of

overbuilding that occurred during the late 1970's and early

1980's.   Consequently, at that time, the Denver office market was

experiencing high vacancy rates of approximately 27 percent, and,

in order to attract lessees, lessors were offering prospective

lessees various types of concessions and low rental rates.    Prior

to the execution of the lease agreement in June 1988, the lessor

under the existing leases for space in Republic Plaza had typi-
                             - 13 -


cally granted periods of free rent as concessions to lessees.       At

the time the lease agreement was executed, the inclusion of such

rent holidays in commercial leases like the lease agreement

involved here was one type of concession offered by lessors that

was a reasonable and acceptable practice in the Denver office

market (and throughout the commercial real estate industry),

irrespective of whether the lessees under such leases intended to

occupy the leased space or to sublease it to others.    Although

Marshall and Stevens expected the practice of including rent

holidays in commercial leases to continue for a few years after

June 1988, it anticipated that the Denver office market would

tighten during those years, with the result that rental rates

would increase, vacancy rates would decrease, and fewer lease

concessions would be granted to lessees by lessors.

     At the time Partnership and BCE entered into the lease

agreement, it was a reasonable and acceptable practice throughout

the commercial real estate industry, including the Denver office

market, to offer rent holidays in long-term commercial leases

such as the lease agreement involved here in order to induce the

lessee/sublessor to agree to assume the risk of subleasing the

unleased, vacant space to others.7    Specifically, in June 1988,

when the lease agreement was executed, it was consistent with

7
   The typical periods of free rent being offered in the Denver
office market at the time the lease agreement was executed were 6
months on 5-year leases and 12 months on 10-year leases.
                             - 14 -


reasonable and acceptable practice throughout the commercial real

estate industry, including the Denver office market, for the

lease agreement to grant an 11.5-month period of zero rent, since

under that agreement BCE was to sublease, rather than occupy,

virtually all of Republic Plaza for about 25 years, and it

thereby assumed the risk of subleasing the approximately 29

percent of unleased, unoccupied space in that building.8

     In order to secure payment on the TIAA term loan, the

purchase agreement contained certain provisions required by TIAA.

Specifically, as of the time of its closing on June 17, 1988, the

purchase agreement obligated (1) Partnership, the obligor under

the TIAA term loan and the lessor under the lease agreement, to

deliver to TIAA an irrevocable standby letter of credit initially

in the amount of $8,872,245 (TIAA letter of credit) that was to

be issued by the Canadian Imperial Bank of Commerce (CIBC) and

that was to name TIAA as beneficiary in order to secure Partner-

ship's obligations under that loan; (2) BCE, the seller of an

undivided 35-percent interest in Republic Plaza and the lessee

under the lease agreement, to deliver to Partnership an irrevoca-


8
   BCE's risk under the lease agreement included its incurring
expenses in order to attract tenants, such as providing improve-
ments to the unleased, vacant space in Republic Plaza and grant-
ing rent holidays at the inception of subleases. The 11.5-month
period of zero rent granted to BCE by the lease agreement en-
hanced the ability of BCE, as sublessor, to grant rent holidays
that were consistent with commercial practice in the Denver
office market to prospective lessees of space in Republic Plaza.
                             - 15 -


ble standby letter of credit initially in the amount of

$8,872,245 (Partnership letter of credit) that was to be issued

by CIBC and that was to name Partnership as beneficiary in order

to secure Partnership's obligations under the TIAA letter of

credit; and (3) Partnership, the obligor under the TIAA term loan

and the lessor under the lease agreement, to assign collaterally

the Partnership letter of credit to CIBC.   During the 11.5-month

period of zero rent, the TIAA letter of credit and the Partner-

ship letter of credit were intended to secure the obligation of

BCE and/or of PFI, the partners of Partnership, to make addi-

tional capital contributions to Partnership during that period as

required by the partnership agreement in order to service the

TIAA term loan.

     As required by the purchase agreement, as of the time of its

closing, (1) Partnership delivered to TIAA the TIAA letter of

credit that was issued by CIBC, effective June 15, 1988, in an

amount not exceeding $8,872,245 and that named TIAA as benefi-

ciary;9 (2) BCE delivered to Partnership the Partnership letter

of credit that was issued by CIBC, effective June 15, 1988, in

the amount of $8,872,245 and that named Partnership as benefi-


9
   The TIAA letter of credit that Partnership delivered to TIAA
expired on Mar. 1, 1989, and was deemed automatically extended
without amendment for 1 year from that or any future expiration
date until no later than June 30, 1991 (unless CIBC notified TIAA
and Partnership at least 40 days prior to any such expiration
date that it decided not to extend the TIAA letter of credit).
                               - 16 -


ciary;10 and (3) Partnership collaterally assigned the Partner-

ship letter of credit to CIBC.

     The lease agreement recited that BCE, as lessee of Republic

Plaza, "has delivered" the Partnership letter of credit with an

expiry date of June 30, 1989, in order to secure BCE's obliga-

tions under that agreement, including its obligation to remit the

basic rent in the amounts and on the dates specified in the rent

payment schedule.11   The lease agreement further recited that

Partnership could assign the Partnership letter of credit to CIBC

as collateral and that, as of June 14, 1988, Partnership had

collaterally assigned its rights in that letter of credit to

CIBC.   Partnership directed BCE in the lease agreement to deliver

the Partnership letter of credit and any extension or replacement

thereof directly to CIBC to be held as collateral on behalf of

Partnership.

10
   The Partnership letter of credit that BCE delivered to Part-
nership expired on Mar. 1, 1989, and was deemed automatically
extended without amendment for 1 year from that or any future
expiration date until no later than June 30, 1991 (unless CIBC
notified Partnership and BCE at least 50 days prior to any such
expiration date that it decided not to extend the Partnership
letter of credit).
11
   Pursuant to the lease agreement, at least 40 days prior to
Dec. 31, 1988, Dec. 31, 1989, and Dec. 31, 1990, respectively,
BCE was required to deliver to Partnership an extension or
replacement of the Partnership letter of credit, or of any such
extension or replacement, in an amount prescribed in the lease
agreement. Each such extension or replacement was to have an
expiry date that occurred no earlier than 30 days and no later
than 60 days after Dec. 31, 1988, Dec. 31, 1989, Dec. 31, 1990,
and Apr. 30, 1991, respectively.
                             - 17 -


     In the Federal partnership return that Partnership filed for

1988, it did not accrue any rent under the lease agreement.

                             OPINION

     Petitioner bears the burden of proving that respondent's

determinations in the FPAA are erroneous.   Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).

     On brief, the parties agree that the lease agreement is a

section 467 rental agreement, as defined in section 467(d), and

that therefore Partnership is subject to section 467.   Section

467 provides in pertinent part:

     (b) ACCRUAL OF RENTAL PAYMENTS.--

          (1) ALLOCATION FOLLOWS AGREEMENT.--Except as
     provided in paragraph (2), the determination of the
     amount of rent under any section 467 rental agreement
     which accrues during any taxable year shall be made--

               (A) by allocating rents in accordance with
          the agreement, and

               (B) by taking into account any rent to be
          paid after the close of the period in an amount
          determined under regulations which shall be based
          on present value concepts.

          (2) CONSTANT RENTAL ACCRUAL IN CASE OF CERTAIN TAX
     AVOIDANCE TRANSACTIONS, ETC.--In the case of any sec-
     tion 467 rental agreement to which this paragraph
     applies, the portion of the rent which accrues during
     any taxable year shall be that portion of the constant
     rental amount with respect to such agreement which is
     allocable to such taxable year.

          (3) AGREEMENTS TO WHICH PARAGRAPH (2) APPLIES.--
     Paragraph (2) applies to any rental payment agreement
     if--

               (A) such agreement is a disqualified
                               - 18 -


          leaseback or long-term agreement, or

               (B) such agreement does not provide for the
          allocation referred to in paragraph (1)(A).

          (4) DISQUALIFIED LEASEBACK OR LONG-TERM
     AGREEMENT.--For purposes of this subsection, the term
     "disqualified leaseback or long-term agreement" means
     any section 467 rental agreement if--

               (A) such agreement is part of a leaseback
          transaction or such agreement is for a term in
          excess of 75 percent of the statutory recovery
          period for the property, and

               (B) a principal purpose for providing in-
          creasing rents under the agreement is the avoid-
          ance of tax imposed by this subtitle.

          (5) EXCEPTIONS TO DISQUALIFICATION IN CERTAIN
     CASES.--The Secretary shall prescribe regulations
     setting forth circumstances under which agreements will
     not be treated as disqualified leaseback or long-term
     agreements, including circumstances relating to--

               (A) changes in amounts paid determined by
          reference to price indices,

               (B) rents based on a fixed percentage of
          lessee receipts or similar amounts,

               (C) reasonable rent holidays, or

               (D) changes in amounts paid to unrelated 3rd
          parties.

     The parties disagree over whether the lease agreement is a

disqualified leaseback or long-term agreement described in

section 467(b)(4).12   In advancing their respective positions

12
   Respondent's primary position in the FPAA was that for 1988
Partnership was required to accrue rent under the lease agreement
in an amount equal to 6.5 (viz, the number of months remaining in
1988 after the execution of the lease agreement on June 14, 1988)
                                                   (continued...)
                               - 19 -


regarding that dispute, the parties focus on the 11.5-month

period of zero rent provided in the lease agreement.

       Petitioner argues that the 11.5-month period of zero rent is

a reasonable rent holiday described in section 467(b)(5)(C) and

that, accordingly, the lease agreement is not to be treated as a

disqualified leaseback or long-term agreement.

       Respondent concedes in her opening brief that

       If petitioner can establish that the absence of rental
       income during this [11.5-month] period [of zero rent]
       qualifies as a reasonable rent holiday under the Code,
       then the Partnership's deferral of this income will not
       be deemed primarily for tax avoidance purposes. In
       such a case, the Partnership would be entitled to
       report the rental income under the economic accrual
       method pursuant to the terms of the lease agreement.13

12
 (...continued)
times the average monthly rent payment due over the entire lease
term. On brief, respondent abandons that position and relies
solely on her alternative position in the FPAA that Partnership
must accrue rent under the lease agreement according to the
constant rental accrual method prescribed in sec. 467(b)(2)
because the lease agreement constitutes a disqualified leaseback
or long-term agreement as defined in sec. 467(b)(4).
13
   We construe the above-quoted concession of respondent to be a
concession by her that increasing rents, if any, under the lease
agreement that are not attributable to the 11.5-month period of
zero rent were not provided for a principal purpose of avoiding
tax under sec. 467(b)(4)(B). Other statements by respondent that
concede this point include the following statement in her answer-
ing brief:

        In addition, at pages 16-17 of its opening brief, peti-
     tioner attempts to prove the nonexistence of a tax-avoid-
     ance motive by emphasizing why the lease was justified in
     increasing lease payments in year 12 of the lease, and
     petitioner's expected increases in projected cash flows
     from future subleases when the building was expected to be
                                                     (continued...)
                                - 20 -


However, respondent contends that the 11.5-month period of zero

rent does not qualify as a reasonable rent holiday described in

section 467(b)(5)(C).14

13
     (...continued)
       fully occupied. The problem with petitioner's arguments is
       that they attempt to prove a non-tax avoidance motive for
       periods and events that occur after the first 11.5 months
       of the lease. Petitioner must justify the fact that the
       nonpayment of rent during the first 11.5 months of the
       lease did not have tax avoidance as its primary motive.
       What happens in year 12 and petitioner's expectations for
       increases in cash flows from future subleases when the
       building is occupied have nothing to do with the forgive-
       ness of rent during the first 11.5 months of the lease. At
       least, petitioner has not established this relationship.
       The key point here is the reasons given by petitioner do
       not establish a business purpose or tax-independent motive
       for the nonpayment of rent during the critical time period
       in dispute. In essence, petitioner's explanation of future
       events is just not focused on the period of time and the
       issue before the Court.
14
   Respondent also makes various assertions in her answering
brief about "several major distortions or unexplained spikes [on
February 1 of each of the 22-annual lease periods following the
11.5-month period of zero rent] in the rental payments over the
long term of the lease" that she alleges are provided in the
rental payment schedule and argues from those assertions that

         Schedule E cannot be said to relate to the terms of the
      lease agreement because of the unexplained distortions
      described above. This is because the lease (Jt. Ex. 9-I,
      pp. 17-18, ¶ 4.1) basically provides that annual rent is
      equal to the lower of fair market rental or 90% of the
      average basic rent. This latter description of rent under
      the lease agreement in no way covers, explains, or relates
      to the several up-and-down increases in rental payment over
      the term of the lease. Therefore, since each of the rental
      payments was not allocated according to the actual terms of
      the lease agreement, the rent leveling and present value
      principles of I.R.C. § 467(b)(2) and § 467(e) apply.

Although it is not altogether clear what respondent intends to
                                                   (continued...)
                             - 21 -


     Respondent further asserts, apparently as an alternative


14
 (...continued)
suggest in the foregoing excerpt from her answering brief,
apparently respondent believes that it supports her position
that, under the facts and circumstances presented here, not
only does the 11.5-month period of zero rent not qualify as a
reasonable rent holiday described in sec. 467(b)(5)(C), it
also was granted for a principal purpose of tax avoidance.
Although we deal below with those contentions, we note that if
respondent also is suggesting by the foregoing passage from
her answering brief that the lease agreement does not provide
for the allocation of rent referred to in sec. 467(b)(1)(A),
see sec. 467(b)(3)(B), we find any such suggestion to be
contrary to the parties' stipulation that "The Lease Agreement
sets forth as Schedule E a schedule that allocates the rental
payments for the entire lease period, providing for the amount
of the rental payments and specifying the due date for each
month." See Piccadilly Cafeterias, Inc. v. United States,
Fed. Cl.     (Aug. 19, 1996).

   We also note that the reasons quoted above that are relied
on by respondent for respondent's conclusion that "Schedule E
cannot be said to relate to the terms of the lease agreement"
cite provisions in the lease agreement that we do not find
relevant to that inquiry. The provisions in the lease agree-
ment on which respondent relies that require the basic rent to
be equal to the lower of fair market rental and 90 percent of
the average monthly installment of basic rent paid by the
lessee during the lease term are to apply only to each of the
first six extensions of that lease term, if any, and were not
prescribed in Schedule E. Schedule E set forth a schedule of
basic rental payments only for the lease term of the lease
agreement that started on June 17, 1988, and ends on June 1,
2013. Moreover, pursuant to the lease agreement, any exten-
sions of the lease term were to occur only at the option of
the lessee, that is to say, only if the lessee elected at the
times and on the terms prescribed in the lease agreement to
extend the lease term beyond June 1, 2013. In this connec-
tion, sec. 467(e)(6) provides that, except as provided in
regulations prescribed by the Secretary, there shall not be
taken into account in computing the term of any agreement for
purposes of sec. 467 any extension that is solely at the
option of the lessee. The Secretary has promulgated no
regulations under sec. 467(e)(6) that apply to the instant
case. See infra note 15.
                                - 22 -


argument, that even if the Court were to hold that the 11.5-month

period of zero rent provided in the lease agreement is a reason-

able rent holiday described in section 467(b)(5)(C) and/or was

not granted for a principal purpose of tax avoidance so that

Partnership shall accrue rent for 1988 under the lease agreement

by allocating that rent in accordance with that agreement as

provided in section 467(b)(1)(A), and not pursuant to the con-

stant rental accrual method as provided in section 467(b)(2),

Partnership nonetheless would be required for 1988 to accrue rent

under section 467(b)(1)(A) in an amount at least equal to the

amount of the Partnership letter of credit (viz, $8,872,245) that

BCE delivered to Partnership.

Reasonable Rent Holiday--Section 467(b)(5)(C)

     The Code does not define what is meant by the term "reason-

able rent holidays" in section 467(b)(5)(C).15   However, the

15
   Although sec. 467(b)(5) required the Secretary to issue
regulations prescribing circumstances relating to, inter alia,
reasonable rent holidays under which agreements will not be
treated as disqualified leaseback or long-term agreements, no
regulations were issued under sec. 467 until June 3, 1996. On
that date, respondent issued proposed regulations under sec. 467
that do not apply to (1) rental agreements entered into prior to
the date on which regulations under that section are published as
final regulations in the Federal Register and (2) disqualified
leaseback and long-term agreements entered into prior to June 3,
1996. Sec. 1.467-8, Proposed Income Tax Regs., 61 Fed. Reg.
27850 (June 3, 1996). Those proposed regulations, which are not
in any event binding on the Court, Zinniel v. Commissioner, 89
T.C. 357, 369 (1987), do not apply to the lease agreement in-
volved here that was entered into in June 1988, and nothing
herein is intended to convey, and nothing herein should be
                                                   (continued...)
                              - 23 -


legislative history of the Deficit Reduction Act of 1984, Pub. L.

98-369, sec. 92(a), 98 Stat. 494, 610, which enacted section 467

into the Code, provides guidance as to the meaning of that term.

The conference committee report (committee report) indicates in

pertinent part:

          In addition, the conferees intend that the regula-
     tions will provide a safe harbor for leases under which
     no rent is payable (or is payable at a reduced rate)
     for a reasonable period of time after the inception of
     the lease. Whether the length of a "rent holiday" is
     reasonable will be determined by commercial practice in
     the locality where the use of the property will occur
     at the time the lease is entered into. The conferees
     expect that, in general, this rent holiday will not
     exceed twelve months, and in no event shall exceed
     twenty-four months. [H. Conf. Rept. 98-861, at 893
     (1984), 1984-3 C.B. (Vol. 2) at 147.]

     Respondent contends that, because the lease agreement does

not label or refer to the 11.5-month period of zero rent as a

"rent holiday", it can never qualify as a reasonable rent holiday

described in section 467(b)(5)(C).     Respondent's contention is

baseless.   As made clear in the committee report, the term "rent

holiday" in section 467(b)(5)(C) simply means a period after the

beginning of a lease during which either no rent is payable or

rent is payable at a reduced rate.     Id.   See also Staff of the

Joint Comm. on Taxation, General Explanation of the Revenue

Provisions of the Deficit Reduction Act of 1984, at 290 (J. Comm.


15
 (...continued)
construed as conveying, the Court's views with respect to any
portion of those proposed regulations.
                                - 24 -


Print 1985).   The 11.5-month period of zero rent provided in the

lease agreement fits squarely within the definition of a rent

holiday in the committee report, and it is not necessary for the

lease agreement to label it as such.

     Respondent also contends that the 11.5-month period of zero

rent cannot qualify as a reasonable rent holiday described in

section 467(b)(5)(C) because at the time Partnership and BCE

entered into the lease agreement in June 1988 the inclusion of

rent holidays in commercial leases was a reasonable and accept-

able practice in the Denver office market only for commercial

leases under which the lessees occupied the leased space, and the

lease agreement was not such a lease.    Rather, it was a master

lease under which BCE, albeit the lessee, was not to occupy

Republic Plaza except for a small amount of space; instead, BCE

was to sublease space in that office building to other persons

who were to occupy it.

     To counter respondent's arguments and to support its posi-

tion that the 11.5-month period of zero rent qualifies as a

reasonable rent holiday described in section 467(b)(5)(C),

petitioner relies, inter alia, on the opinions of two expert

witnesses, Mr. Atkins and Mr. Whitcomb, who are qualified as

experts in real estate appraisal and who prepared the Marshall

and Stevens appraisal report.

     We evaluate the opinions of experts in light of the quali-
                                - 25 -


fications of each expert and all other evidence in the record.

Estate of Christ v. Commissioner, 480 F.2d 171, 174 (9th Cir.

1973), affg. 54 T.C. 493 (1970); IT&S of Iowa, Inc. v. Commis-

sioner, 97 T.C. 496, 508 (1991); Parker v. Commissioner, 86 T.C.

547, 561 (1986).     We have broad discretion to evaluate "'the

overall cogency of each expert's analysis.'"     Sammons v. Commis-

sioner, 838 F.2d 330, 334 (9th Cir. 1988) (quoting Ebben v.

Commissioner, 783 F.2d 906, 909 (9th Cir. 1986), affg. in part

and revg. in part on another issue T.C. Memo. 1986-318.     We are

not bound by the formulae and opinions proffered by an expert,

especially when they are contrary to our own judgment.     Orth v.

Commissioner, 813 F.2d 837, 842 (7th Cir. 1987), affg. Lio v.

Commissioner, 85 T.C. 56 (1985); Silverman v. Commissioner, 538

F.2d 927, 933 (2d Cir. 1976), affg. T.C. Memo. 1974-285; Estate

of Kreis v. Commissioner, 227 F.2d 753, 755 (6th Cir. 1955),

affg. T.C. Memo. 1954-139.     Instead, we may reach a decision

based on our own analysis of all the evidence in the record.

Silverman v. Commissioner, supra at 933.     The persuasiveness of

an expert's opinion depends largely upon the disclosed facts on

which it is based.    See Tripp v. Commissioner, 337 F.2d 432, 434

(7th Cir. 1964), affg. T.C. Memo. 1963-244.     While we may accept

the opinion of an expert in its entirety, Buffalo Tool & Die

Manufacturing Co. v. Commissioner, 74 T.C. 441, 452 (1980), we

may be selective in the use of any portion of such an opinion.
                               - 26 -


Parker v. Commissioner, supra at 562.    Furthermore, we may reject

the opinion of an expert witness in its entirety.   See Palmer v.

Commissioner, 523 F.2d 1308, 1310 (8th Cir. 1975), affg. 62 T.C.

684 (1974); Parker v. Commissioner, supra at 562-565.

     We have evaluated the Marshall and Stevens appraisal report

and the letters, opinions, and analyses of Mr. Atkins and Mr.

Whitcomb, both of whom we found credible.   We found that report

and those letters, opinions, and analyses to be cogent and

persuasive, and we have relied on them in making our findings

herein.

     According to Mr. Atkins, at the time the lease agreement was

signed in June 1988, lessors in the Denver office market were

typically offering 6 months of free rent on 5-year leases and 12

months of free rent on 10-year leases.   In the opinion of Mr.

Atkins, the 11.5-month period of zero rent provided in the lease

agreement was consistent with reasonable and acceptable practice

in the Denver office market at the time that lease agreement was

executed.16   According to Mr. Atkins, it was a reasonable and

16
   Although Mr. Atkins did not identify a situation in the
Denver office market of a rent holiday being offered in a lease
under which the lessee did not occupy the leased space, he did
identify two situations in localities outside that market in
which lessees who did not occupy the leased spaced received rent
holidays and discussed, but did not identify because of con-
straints imposed on him regarding their confidentiality, certain
other situations of which he was aware in which lessees received
rent holidays and did not occupy the leased space. According to
Mr. Atkins, those situations about which he testified were
                                                   (continued...)
                              - 27 -


acceptable practice throughout the commercial real estate indus-

try, including in the Denver office market, for Partnership to

provide an 11.5-month period of zero rent in the lease agreement

in order to induce the lessee, BCE, to sign the lease agreement

which covered approximately 25 years and under which BCE, and not

Partnership, assumed the risk of subleasing the building at a

time when about 29 percent of it was vacant.17

16
 (...continued)
illustrative of commercial practice in the Denver office market
at the time Partnership and BCE entered into the lease agreement.
In Mr. Atkins' opinion, at the time the lease agreement was
executed, granting rent holidays like the 11.5-month period of
zero rent provided in the lease agreement to lessees who did not
occupy the leased space was a reasonable and acceptable practice
in the Denver office market.
17
   According to Mr. Atkins, a period of free rent with respect
to leased space is equivalent to having a vacancy for that period
because no rent is being paid with respect to that space. He
indicated that the average vacancy rate for leased space over the
term of a lease can be calculated by comparing the length of a
period of free rent to the total term of the lease. Thus, for
example, if a 5-year lease were to provide for 6 months of free
rent, that would be equivalent to having an average vacancy rate
of 10 percent over the term of the lease. Providing the 11.5-
month period of zero rent in the lease agreement, which covered
approximately 25 years, was equivalent to an average vacancy rate
of approximately 3.8 percent over the lease term. In the opinion
of Mr. Atkins, Partnership experienced less risk (viz, an average
vacancy rate of only 3.8 percent over the lease term) by execut-
ing the lease agreement with the 11.5-month period of zero rent
than if it had assumed and retained the risk of leasing Republic
Plaza, including the approximately 29 percent that was vacant at
the time the lease agreement was executed, to one or more lessees
who intended to occupy the building. BCE, as sublessor, assumed
the risk of leasing the approximately 29 percent of Republic
Plaza that was unoccupied when the lease agreement was executed.
That risk included its incurring expenses in order to attract
tenants, such as providing improvements to the unleased, vacant
                                                   (continued...)
                              - 28 -


     The 11.5-month period of zero rent granted to BCE by the

lease agreement enhanced the ability of BCE, as sublessor, to

grant rent holidays that were consistent with commercial practice

in the Denver office market to prospective lessees in Republic

Plaza.   In fact, prior to the execution of the lease agreement,

the lessor of Republic Plaza had granted periods of free rent as

concessions to lessees and, according to the Marshall and Stevens

appraisal report, it was expected that that practice in Republic

Plaza and in other office buildings in the Denver office market

would continue for a few years after the execution of the lease

agreement.

     Mr. Whitcomb provided additional support for petitioner's

position regarding the 11.5-month period of zero rent.   In a

letter he prepared with respect to a sale-leaseback transaction

involving persons unrelated to Partnership, he concluded that a

12-month rent holiday at the beginning of a 27-year lease, under

which the lessee was responsible for paying rent on the entire

leased building, was a reasonable and acceptable practice for

inducing a lessee to enter into such a lease.   Mr. Whitcomb

testified that his conclusion in that letter would not have

changed if the lessee had not been planning to occupy the leased

premises, but had intended to act only as a sublessor.

17
 (...continued)
space in Republic Plaza and granting rent holidays at the incep-
tion of subleases.
                                - 29 -


     Although respondent contends that the 11.5-month period of

zero rent was inconsistent with commercial practice in the Denver

office market at the time the lease agreement was executed

because it was included as part of a master lease, she has not

established that contention as fact.     Indeed, her contention is

refuted by the record herein.    On that record, we have found that

providing the 11.5-month of zero rent in the lease agreement was

consistent with reasonable and acceptable practice throughout the

commercial real estate industry, including the Denver office

market, at the time the lease agreement was executed.18

     To counter petitioner's contention that the 11.5-month

period of zero rent qualifies as a reasonable rent holiday

described in section 467(b)(5)(C) because it was consistent with

commercial practice in the Denver office market at the time the

lease agreement was signed, respondent contends that the commit-

tee report provides that only the determination of whether the

duration of a rent holiday is reasonable is to be determined

based on commercial practice in the locality where the property

is to be used.   From that premise, respondent asserts that, even

though the length of the 11.5-month period of zero rent is, in


18
   In assisting PFI in evaluating its proposed investment in
Republic Plaza, Marshall and Stevens drew no distinctions between
master leases of the type involved in this case and other types
of leases with respect to the granting of rent holidays. That
was obviously because, in their opinion, there are no such
distinctions that should be made.
                              - 30 -


fact, reasonable based on commercial practice in the Denver

office market, petitioner must nonetheless establish a nontax

business purpose for Partnership's granting that rent holiday in

order for it to qualify as a reasonable rent holiday described in

section 467(b)(5)(C).   It is not clear to us what respondent

means by this assertion.

     If it is respondent's position that petitioner must estab-

lish the commercial reasonableness in the Denver office market of

not only the duration of the rent holiday at issue, but also the

granting of, and the amount of rent reduction during, that rent

holiday, we agree.   If it is respondent's position that peti-

tioner must establish a nontax business purpose for the granting,

the duration, and the amount of the rent holiday at issue other

than to conform to commercial practice in the Denver office

market at the time the lease agreement was executed, we disagree.

Any such position would be contrary to the concept of, and the

reasons for enacting, a "safe harbor" provision like section

467(b)(5)(C) and is not supported either by the language of the

safe-harbor provision in question (i.e., section 467(b)(5)(C)) or

its legislative history.

     We have found on the record before us that at the time the

lease agreement was executed Partnership was aware of, inter

alia, the condition of the Denver office market and the practice

in that market of offering rent holidays and other lease conces-
                               - 31 -


sions to attract lessees.   We have also found that at the time

Partnership and BCE entered into the lease agreement in June 1988

it was a reasonable and acceptable practice throughout the

commercial real estate industry, including the Denver office

market which generally was suffering from high vacancy rates, to

grant an 11.5-month period of free rent in commercial leases such

as the lease agreement involved here, where the lease term

covered about 25 years and the lessee assumed the risk of sub-

leasing the approximately 29 percent of unleased, vacant space in

the building.

     Based on our examination of the entire record before us, we

find that the 11.5-month period of zero rent provided by the

lease agreement qualifies as a reasonable rent holiday described

in section 467(b)(5)(C).    Respondent concedes that if the Court

were to so find, "Partnership would be entitled to report the

rental income under the economic accrual method pursuant to the

terms of the lease agreement."19   Accordingly, pursuant to that

concession, Partnership shall accrue rent for 1988 under the

lease agreement in accordance with that agreement as provided in

section 467(b)(1)(A).


19
   In light of our finding that the 11.5-month period of zero
rent qualifies as a reasonable rent holiday described in sec.
467(b)(5)(C) and respondent's concession, we shall not consider
petitioner's additional arguments that the basic rent to be paid
by BCE under the lease agreement satisfies the guidelines of Rev.
Proc. 75-21, 1975-1 C.B. 715, and that, under the facts and
circumstances presented here, tax avoidance was not a principal
purpose for providing for increasing rents under the lease
agreement.
                               - 32 -


Partnership Letter of Credit

     Although the parties stipulated that the lease agreement set

forth as Schedule E a schedule that allocates the rental payments

for the entire lease term, specifying the amounts and due dates

of such payments, respondent nonetheless argues that if the Court

were to hold that the 11.5-month period of zero rent is a reason-

able rent holiday described in section 467(b)(5)(C), Partnership

would be required for 1988 to accrue rent under section

467(b)(1)(A) in an amount at least equal to the amount of the

Partnership letter of credit (viz, $8,872,245) that BCE delivered

to Partnership.   Because we have some difficulty in understanding

respondent's argument, we shall quote it in pertinent part:

     respondent asserts that the lease allocates at least
     $8,872,245.00 to the first 11.5 months of the lease by
     providing for a letter of credit. The letter of credit
     was delivered by the lessee, BCE, to the petitioner,
     dated June 15, 1988, in the amount of $8,872,245.00.
     (Stip. ¶ 26, Jt. Ex. 7-G), and the lease agreement
     itself [sic]. (Jt. Ex. 9-I).

          Pursuant to the specific provisions of the lease
     agreement * * * the lessee is specifically required to
     deliver a letter of credit to secure payment of the
     basic rent under the lease in the event the lessee de-
     faults on its lease payments. Furthermore, the time
     period covered by this letter of credit is from June
     15, 1988, the date the lessee delivered the letter of
     credit to the petitioner * * * until June 30, 1989.
     * * *. Not coincidentally, the time period covered by
     the letter of credit equates to the 11.5-month rent
     holiday claimed by the petitioner.

          Clearly, by its very terms, the existence of the
     letter of credit indicates that rent is not forgiven in
     the first year of the lease in the event the lessee
     defaults. Under the lease, the letter of credit se-
                               - 33 -


     cures the payment of rent during the first 11.5 months
     of the lease in the amount of $8,872,245.00. It is
     incongruous for petitioner to argue that zero rent is
     allocated to the first 11.5 months of the lease when
     the letter of credit is clearly a provided-for substi-
     tute in the form of security for any rent that is not
     paid during this period in the amount of $8,872,245.00.
     Therefore, under the terms of the lease agreement, at
     least $8,872,245.00 is allocated to the lease term and
     must be accrued by petitioner in the first 11.5 months
     of the lease, if the Court finds that the parties to
     the lease should have followed the allocations made
     under the lease under I.R.C. § 467(b)(1)(A).

     In addition to being difficult to comprehend, the foregoing

argument of respondent regarding the Partnership letter of credit

is premised upon certain allegations of fact that are not estab-

lished by the record herein.   In this regard, it will be helpful

to quote pertinent portions of the lease agreement.   That agree-

ment recited:

     53. LETTER OF CREDIT. As security for the payment of
     Basic Rent, Lessee has delivered a letter of credit
     (herein, such letter of credit, and each extension or
     replacement thereof pursuant to this Section 53, is
     called the "Letter of Credit") in the aggregate amount
     equal to $8,872,245, with an expiry date of June 30,
     1989, issued by Canadian Imperial Bank of Commerce
     ("CIBC") and Citicorp Real Estate, Inc., and with the
     Lessor * * * as beneficiary, which Letter of Credit may
     be assigned for collateral purposes by the Lessor to
     Canadian Imperial Bank of Commerce * * *.

          In addition to the foregoing, at least forty (40)
     days prior to the expiration of the first, second and
     third Lease Years (hereinafter defined), except to the
     extent that any prior Letter of Credit shall have been
     drawn up, Lessee shall likewise deliver to the benefi-
     ciary [Partnership] an extension of or replacement for
     the Letter of Credit in an aggregate amount * * * equal
     to the following * * *.

                *   *     *      *      *    *    *
                             - 34 -


          Lessor has collaterally assigned its rights in the
     Letter of Credit * * * under this Section 53 to Cana-
     dian Imperial Bank of Commerce and in accordance with
     such collateral assignment, Lessor hereby directs
     Lessee: to deliver the initial Letter of Credit and
     any extension thereof or replacement therefor directly
     to Canadian Imperial Bank of Commerce to be held as
     collateral by such Bank on Lessor's behalf with a copy
     thereof to Lessor.

     Respondent alleges that specific provisions of the lease

agreement required BCE to deliver to Partnership the Partnership

letter of credit that was effective on June 15, 1988.   It is the

purchase agreement, and not the lease agreement, that required

BCE to deliver that letter of credit to Partnership, although the

lease agreement contemplated that such letter of credit had been

delivered.20

     As required by TIAA, the purchase agreement required that,

as of the closing of that agreement, (1) Partnership deliver to



20
   As a further illustration of certain inaccurate factual
allegations made by respondent in advancing her position with
respect to the Partnership letter of credit, we note that,
contrary to respondent's assertion that "the time period covered
by the [Partnership] letter of credit equates to the 11.5-month
rent holiday claimed by the petitioner", the initial Partnership
letter of credit was issued effective June 15, 1988, and had an
expiry date of Mar. 1, 1989. Even if that letter of credit had
had the expiry date of June 30, 1989, that was recited in the
lease agreement quoted above, the period covered by it would not,
contrary to respondent's assertion, "equate * * * to the 11.5-
month rent holiday claimed by the petitioner", since that period
of zero rent began on June 17, 1988, and ended on May 31, 1989.
We also note that, contrary to certain recitations in the lease
agreement quoted above, the Partnership letter of credit that was
in fact delivered to Partnership and assigned to CIBC, as re-
quired by the purchase agreement, was issued only by CIBC, and
not by CIBC and Citicorp Real Estate, Inc.
                              - 35 -


TIAA the TIAA letter of credit for the benefit of TIAA in order

to secure payment of Partnership's obligations under the TIAA

term loan, (2) BCE deliver to Partnership the Partnership letter

of credit for the benefit of Partnership in order "to secure the

Partnership's obligations under the TIAA Letter of Credit", and

(3) Partnership collaterally assign the Partnership letter of

credit to CIBC.   Although the lease agreement recited that the

Partnership letter of credit that BCE delivered to Partnership,

as required by the purchase agreement, was to serve as security

for BCE's obligations under the lease agreement, including its

obligation to pay rent, the purchase agreement is the operative

document that obligated BCE to deliver the Partnership letter of

credit to Partnership and that obligated Partnership to assign

collaterally the Partnership letter of credit to CIBC.21


21
   Under the lease agreement, BCE was required to extend the
Partnership letter of credit periodically through a date not to
exceed 60 days after Apr. 30, 1991. Thus, the Partnership letter
of credit related to certain annual lease periods following the
11.5-month period of zero rent. We believe that when the lease
agreement recited that the Partnership letter of credit was
delivered as security for the payment of basic rent, it was
referring to the annual lease periods following the 11.5-month
period of zero rent that ended no later than June 30, 1991,
during which the lease agreement obligated BCE to pay monthly
prescribed amounts of basic rent, and not to the first 11.5
months of the lease term during which BCE was not obligated by
that agreement to pay any rent. We also note that, during the
11.5-month period of zero rent, the TIAA letter of credit and the
Partnership letter of credit, both of which were effective on
June 15, 1988, were intended to secure the obligation of BCE
and/or of PFI, the partners of Partnership, to make additional
capital contributions to Partnership during that period as
                                                   (continued...)
                             - 36 -


     On the entire record before us, we find that the lease

agreement did not allocate rent to the 11.5-month period of zero

rent in an amount equal to the Partnership letter of credit (or

in any other amount) and that Partnership is not required for

1988 to accrue as rent the amount of that letter of credit.

     To reflect the foregoing and the concessions of the parties,



                                        Decision will be entered

                                   under Rule 155.




21
 (...continued)
required by the partnership agreement in order to service the
TIAA term loan.
