In New York, a mortgage recording tax must be paid when a mortgage is recorded. The amount of the mortgage tax is equal to a percentage of the principal amount of the indebtedness secured by, or which may be secured by, the mortgage being recorded. The applicable percentage used to calculate the mortgage tax ranges from 0.75 percent to 2.80 percent, depending on the county in which the mortgage is recorded and the amount of indebtedness secured.
Mortgage tax is generally paid by the borrower in commercial loan transactions. It is often one of the most signiﬁcant costs of obtaining ﬁnancing secured by real property, particularly in counties in which the mortgage tax rate is high. As a result, in an effort to control expenses, borrowers and lenders typically attempt to structure a secured ﬁnancing to limit mortgage tax liability, if possible.
In the case of a mortgage securing a single advance term loan, e.g., a purchase money mortgage, the mortgage tax implications are straightforward. Mortgage tax on the principal amount of the term loan is paid only once at the time that the mortgage is recorded. No additional mortgage tax is payable unless the amount of the indebtedness secured by the mortgage is later increased.
Other considerations arise, however, when the mortgage being recorded secures a revolving credit line which provides for future advances, repayments and re-advances, subject only to a limitation on the maximum principal amount which may be outstanding at any one time. The maximum principal amount secured by the mortgage—i.e., the “cap amount”—is set forth in the mortgage instrument itself. Because the credit line is revolving, however, the amount of advances and re-advances under the revolving credit line in the aggregate over the life of the loan likely will exceed the cap amount. In the case of a revolving credit line mortgage, mortgage tax is initially calculated based on the cap amount as stated in the mortgage. If the aggregate advances or re-advances made under the revolving credit line exceed the cap amount used in the initial mortgage tax calculation, additional mortgage tax is payable on the excess amounts advanced. As a result, the borrower is exposed to additional mortgage tax liability when the aggregate amount of advances under the revolving credit line exceeds the cap amount.
Similarly, in the case of a mortgage securing a guaranty of a revolving credit line, mortgage tax is initially calculated based on the maximum amount guarantied as stated in the guaranty. If the aggregate advances or re-advances made pursuant to the underlying revolving credit line exceed the maximum amount guarantied as stated in the guaranty and used in the initial mortgage tax calculation, additional mortgage tax is payable on the amounts re-advanced up to the maximum amount guarantied.
There is, however, a limited statutory exemption with respect to certain smaller revolving credit line mortgages. Section 253-b of the Tax Law provides that, subject to several exceptions, re-advances under a credit line mortgage securing a maximum principal amount of less than $3,000,000, recorded on and after November 6, 1996, are not subject to additional mortgage tax.
This statutory exemption does not, however, apply to all revolving credit line mortgages securing less than $3,000,000 and itself is subject to several exceptions, including:
First, the exemption does not apply to a revolving credit line mortgage securing a building loan contract.
Second, in order for the exemption to apply, the mortgage must secure only a revolving credit line. For example, a mortgage which secures both a $1,000,000 revolving credit line and a $1,000,000 term loan does not qualify for the exception, even though the total indebtedness secured is less than $3,000,000, because the entire credit facility secured is not a revolving credit line.
Third, the debt instrument—e.g., note, credit agreement, etc.— executed in connection with the mortgage must expressly limit the maximum principal amount which may be outstanding at any time to the maximum principal amount secured by the mortgage. As a result, if a debt instrument providing for a revolving loan in a maximum amount greater than $3,000,000 is secured, in part, by a mortgage securing the maximum principal amount of less than $3,000,000, the mortgage does not qualify for the exemption.
Fourth, the exemption does not apply to a mortgage securing a guaranty of a revolving credit line because the re-advances under the revolving credit line are made to the borrower(s) under the revolving credit line rather than the guarantor/mortgagor.
The exemption provided by Section 253-b of the Tax Law is useful in limiting the borrower’s mortgage tax liability with respect to most secured revolving credit lines in the maximum principal amount of less than $3,000,000. To the extent that a proposed revolving credit loan secured, in whole or in part, by real property in New York does not fall within the narrow circumstances addressed by this exemption, borrowers and lenders should consider exploring other structures which may reduce the borrower’s potential mortgage tax liability.