Mortgage Recording Tax Guidance on Mortgages Partially Securing Multiple Debts

On January 7, 2012, the New York State Department of Taxation and Finance (“Department”) issued a tax bulletin[1] explaining the applicability of the mortgage recording tax to mortgages partially securing multiple debts when the amounts secured by such mortgages are subject to a provision specifying the maximum amount that may be secured (i.e., a cap).  Highlights of the tax bulletin are summarized below.

Mortgage Recording Tax and the Cap

The mortgage recording tax is imposed on the recording of a mortgage on real property situated within New York, and is computed based on the amount of principal debt or obligation which is, or under any contingency may be, secured by the recorded mortgage. 

When a mortgage or mortgage securing a revolving line of credit is capped by a maximum-amount-secured provision, mortgage recording tax is paid on the cap amount.  If a cap is increased to secure new or further indebtedness, mortgage recording tax is payable when the instrument evidencing the increase is recorded.  While advances up to the cap are secured by the mortgage and are enforceable, advances and re-advances in excess of the cap are not secured by the mortgage and are not enforceable until an instrument evidencing the advances and re-advances is recorded and the mortgage recording tax is paid.

According to the tax bulletin, advances and re-advances in excess of the cap are not subject to mortgage recording tax so long as the mortgage includes language indicating all of the following: (1) the mortgage secures the first sums to be advanced by the lender; (2) so long as the balance of the mortgage debt remains above the cap[2], 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.

Mortgage Securing Multiple Debts

According to the bulletin, when different notes or bonds are secured by the same mortgage, the holders of the various notes and bonds share proportionately in the proceeds of the mortgage security in a potential foreclosure action.  Therefore, a mortgage containing a maximum-amount-secured provision that is given as partial security for multiple debts or obligations must identify the fraction of the cap that applies to each debt since the holders of the obligations generally share proportionately in the proceeds of the mortgage security in a mortgage foreclosure action.  Doing so ensures that: (1) the cap will not be prorated based on the balance of each debt over the total balance of all debts at the time the mortgage is executed; and (2) the proper mortgage recording tax for each secured debt is paid when the mortgage is recorded; and (3) the mortgage is enforceable against each debt.  In addition, it is also necessary to determine the portion of the cap that applies to each debt in order to determine if one or more of the secured debts is paid down below the secured amount, and a supplemental instrument is recorded reflecting further advances subject to the mortgage recording tax.

Mortgage of a Guarantee[3]

When a guarantee is secured by a mortgage, mortgage recording tax must be paid on the maximum amount secured by the guarantee when the mortgage is recorded. 

According to the bulletin, if principal of the debt is advanced up to or exceeding the guarantee amount, and the balance of the guaranteed debt subsequently falls below the amount initially secured by the guarantee and mortgage, mortgage recording tax is imposed upon the recording of any instrument evidencing advances and re-advances, up to the guarantee amount.  Additionally, the bulletin confirms that the cap provisions apply to a mortgage given as security for a guarantee, and that the guidance related to advances and re-advances are deemed to refer to the guaranteed debt.  Accordingly, when a mortgage partially secures a guarantee given as security for multiple debts or obligations, the mortgage must identify the fraction of the cap secured by the guarantee that applies to each debt or obligation, so as to ensure that the proper mortgage recording tax is paid.

The department’s guidance has broad-sweeping implications for many debt-financed real estate transactions, including revolving credit line mortgages.

For more information, contact Charles W. Russell at (585) 419-8635 / crussell@harrisbeach.com, Andrew Q. Conroy at  (585) 419-8711 / aconroy@harrisbeach.com, or the Harris Beach attorney with whom you usually consult.

This legal alert does not purport to be a substitute for advice of counsel on specific matters.

Harris Beach has offices throughout New York State, including Albany, Buffalo, Ithaca, New York City, Niagara Falls, Rochester, Saratoga Springs, Syracuse, Uniondale, White Plains and Yonkers, as well as Newark, New Jersey, and New Haven, Connecticut.
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