Assignments of mortgage and potential mortgage recording tax savings

In NYS, the requirement to pay mortgage recording tax1 on the principal amount secured by a mortgage on real property located within the state can significantly increase the cost of an acquisition or refinance transaction. This is especially true for commercial properties in N.Y.C., where mortgage tax rates are higher than all other counties in the state. The mortgage recording tax rate for such properties is 2.05% on any mortgage that is less than $500,000, and 2.8% on any mortgage that is $500,000 or more. So, for example, in a purchase transaction of a mixed-use building for $10 million where the purchaser is financing 60% of the purchase price, the mortgage tax on a $6 million mortgage would be $168,000. Of course, this tax is in addition to other closing costs and expenses that are associated with such a transaction. The purchaser of such a property would potentially be able to realize a significant savings if the seller has an existing mortgage on the property and the seller's lender is willing to assign the mortgage to the purchaser's lender. Since the seller already paid mortgage recording tax when it took out its mortgage, NYS does not require mortgage recording tax to be paid again on the amount of the outstanding principal balance of the existing mortgage2 to the extent it is assigned and continues to secure a bona fide indebtedness3. Continuing with the example above, if the outstanding principal balance of the seller's existing mortgage is $2.35 million, the purchaser will at closing execute a "gap" mortgage in the amount of $3.65 million in favor of the purchaser's lender, and this "gap" mortgage will be consolidated4 with the lien of the seller's prior mortgage which is assigned to the purchaser's lender to form a single lien in the amount of $6 million. The purchaser will pay mortgage recording tax in the amount of $102,200 on the "new money" represented by the "gap" mortgage only, thereby saving a total of $65,800. Typically, the purchase agreement will provide that the purchaser will pay any fees of the seller's prior lender in connection with the assignment of mortgage, including its attorneys' fees, and sometimes the seller will only agree to permit the purchaser to negotiate such an assignment if the purchaser is willing to split the mortgage tax savings with the seller. Such agreements to share the mortgage tax savings have even found their way to residential transactions, since purchase prices for luxury condos often exceed those of smaller multifamily, mixed-use and other commercial properties. The practice of negotiating assignments of mortgage is equally applicable to refinance transactions where the borrower refinances a mortgage loan with another lender, and the concept of consolidating the liens of mortgages for the purpose of saving mortgage recording tax is similarly pertinent where the borrower refinances a mortgage loan with the same lender. Although the existing mortgage lender is not required by law to assign its existing mortgage to the new lender, and the new mortgage lender is not required to accept an assignment of an existing mortgage, many lenders often do agree to accommodate such a request to the extent possible because of the significant savings to the borrower. 1. Under Article 11 of the Tax Law. 2. Section 255 of Real Property Law. 3. Section 275 of Real Property Law. 4. Pursuant to a Consolidation, Extension and Modification Agreement or some similar agreement. Pierre Debbas, Esq., and Guy Arad, Esq. are partners at Romer Debbas, LLP, New York, N.Y.