The quirks inherent in New York State’s mortgage recording statutes often cause out-of-state practitioners some frustration, especially if they practice in a state that does not have a mortgage recording tax.
These issues often arise within and are most prominent in refinances and M&A transactions that involve properties in multiple states, one of which is New York.
What follows are some of the peculiarities of the New York mortgage tax that out-of-state practitioners should be aware of.
Mortgage Recording Tax – Cap the Principal Amount Secured
This tip may be common sense, but in New York a commercial mortgage lender must set the maximum amount of principal secured by the property within the mortgage, preferably in a prominent spot on the first page of the mortgage.
This will establish the mortgage tax liability. If the borrower has a $10 million term loan and it is secured by five properties, only one of which is in New York, then one will need to allocate a set amount to the New York property. If a lender fails to do this, it could end up paying mortgage tax on the entire term loan amount.
“Last dollar” language should also be included in the mortgage. A typical last dollar clause states that so long as the aggregate amount of the secured obligations exceed the maximum secured amount under the mortgage, any payments of the secured obligations shall not reduce the maximum secured amount.
In addition to the maximum principal amount secured, the mortgage may also secure interest payable on the indebtedness secured by the mortgage, and incidental amounts, such as expenses incurred by the lender to preserve the value of the mortgage.
No mortgage tax is paid to secure these items. Breakage costs associated with an interest rate swap agreement may also be included as incidental amounts if certain conditions are satisfied.
Mortgage Recording Tax – The Existing Mortgage Has Value
In New York, particularly in the context of a refinance, it is a benefit to the borrower for the existing mortgage to be assigned to the new lender. The assignment of an existing mortgage to the new lender allows the borrower to avoid paying mortgage tax on the existing amount of principal secured by the assigned mortgage, which is typically then consolidated with the new money portion of the refinance to form a new lien in the consolidated amount.
The documentation necessary to assign, modify and consolidate a mortgage is formulaic and cumbersome, but will serve to save the borrower money.
It is also important to negotiate with the lender a clause in the existing mortgage pursuant to which the lender commits to an assignment of the existing mortgage to a new lender. This way, the borrower is ensured the ability to take advantage of mortgage tax previously paid upon its refinance.
Beware of Revolving Credit Mortgages
Securing a commercial revolving credit line in New York with a mortgage is difficult and fraught with risk. New York does provide for a mechanism to secure commercial revolving loans under $3,000,000. For commercial facilities in excess of that amount, especially credit facilities for large borrowers with real property in multiple states, a New York mortgage is not likely to be an option absent significant structuring.
The risks of securing revolving debt include mortgage tax assessed against amounts which have been repaid and re-borrowed, and the inability to assign, satisfy or enforce the underlying mortgage absent payment of such taxes.
There is guidance from New York State that a revolving loan may be secured by a New York mortgage if the outstanding balance of the revolving loan remains at all times above the maximum secured principal amount set forth in the New York mortgage, and the following language is included: 1) The mortgage secures the first sums to be advanced by the lender, 2) as long as the balance of the mortgage debt remains above the cap, the secured portion of the mortgage debt will equal the cap, and 3) only the last and final payments will be used to reduce and satisfy the secured portion of the mortgage debt.
If the maximum principal amount of the revolving note is increased, no further mortgage tax is due if the maximum amount secured by the related mortgage does not increase and the balance of the outstanding debt stays above the cap.
(This confirmation was provided in response to a hypothetical revolving note secured by a mortgage with a maximum amount secured provision, which also contained the required language for securing a revolving note outside of a credit line mortgage under Section 253-b of the Tax law.)
Securing Multiple Types of Debt – The Allocation
The New York State Department of Taxation and Finance has historically taken the position that a lender cannot secure different types of debts through the same mortgage instrument – i.e. term debt and revolving debt.
The department clarified this position in a 2013 bulletin. A mortgage may secure multiple types of debts, with each type of debt governed by its respective mortgage tax rules.
To the extent there is a cap on the amount secured, if the mortgage cap is not explicitly allocated among the debt instruments, then it will be implicitly allocated among the debt instruments based on the balance of each debt over the total balance of all debts at the time the mortgage is executed.
This is an important point to note, as it could also result in unintended consequences if the parties do not explicitly allocate the mortgage cap.
Mortgages that Secure Properties in Multiple Counties
To complicate things further, the mortgage tax rate in New York varies by county. This becomes impactful when the mortgage secures properties located in different counties, and those counties have differing mortgage rates.
Typically, the entire mortgage tax is paid to the recording officer of the county where the mortgage is first recorded. When the mortgage tax differs between the counties, there are various options available to ensure that the proper amount of mortgage tax is paid to each respective county.
Overall, the peculiarities of the New York mortgage tax rules can be overcome, but it is important to engage New York counsel to assist with the state-specific aspects of a lender’s transaction to help it accomplish that goal.
Michael Reyen is an attorney with Hodgson Russ, a law firm representing more than 80 U.S.-based and foreign financial institutions, ranging from large multi-state banks to small community banks, as well as mortgage lenders and servicers, credit card companies, insurance companies, securities firms, and other financial services institutions. Reyen represents companies, developers, landlords, tenants, financial institutions, municipalities, and nonprofit organizations in a wide range of commercial real estate matters, including acquisition, development, financing, leasing, and construction matters.