A housing development fund company (HDFC) financed a whole subdivision with one exempt construction loan mortgage on its fee interest, then severed it into separate substitute mortgages as individual houses are sold to buyers who assume permanent financing. Are those substitute mortgages, and the later buyer assumption/extension agreements, still exempt from mortgage recording tax?

Plain-English summary

Housing development fund companies (HDFCs) are organized under Article XI of the Private Housing Finance Law and § 402 of the Not-For-Profit Corporation Law to develop affordable housing for lower-income persons and families, typically with government subsidy assistance. A common financing pattern: the HDFC, as fee owner of a development site, obtains a construction loan mortgage from an institutional lender secured by its fee interest — and pays no mortgage recording tax on that mortgage, because Private Housing Finance Law § 577(2) specifically exempts mortgages of an HDFC from Article 11 mortgage recording tax.

As the project nears completion and individual houses/lots become ready for sale, the HDFC and the original construction lender typically enter a mortgage modification and severance agreement splitting the single construction loan mortgage into two or more SUBSTITUTE mortgages, each covering a different portion of the original premises — without formally satisfying or discharging the original mortgage of record; as each substitute mortgage is recorded, the corresponding portion is released from the original lien. From there, either: (1) the HDFC transfers title to an individual buyer, who simultaneously enters an extension and modification agreement with the original lender (or its affiliate) assuming the debt as a permanent loan at new interest rate/repayment terms; or (2) the substitute mortgage is first assigned to a different, third-party lender, and then the buyer enters the extension/modification agreement with that assignee instead. In both scenarios, the total debt secured across all the substitute mortgages equals the original construction loan's unpaid balance — no new money is added.

The Department first confirmed that the SUBSTITUTE mortgages the HDFC executes to the original lender are exempt simply because they are mortgages "of" the HDFC under Private Housing Finance Law § 577(2) and 20 NYCRR § 644.1(b)(9) — following its own prior opinion for Habitat for Humanity (TSB-A-00(4)R). Because that exemption resolves the question on its own terms, the Department didn't even need to separately analyze whether Tax Law § 255's supplemental-mortgage provisions would independently exempt the severance.

For the buyer assumption/extension/modification step, the Department treated each substitute mortgage as the "recorded primary mortgage" (properly tax-paid, i.e., exempt) for purposes of Tax Law § 255, and found that the extension and modification agreements — adjusting payment terms, interest rates, or substituting a new mortgagor as the buyer takes over — squarely fit the "supplemental mortgage" definition in 20 NYCRR § 645.1(a)(5), which explicitly covers modifications changing loan terms or substituting a new mortgagor or mortgagee. Since these agreements don't add any NEW or further indebtedness beyond what the substitute mortgage already secured, they remain untaxed — and this holds true whether the buyer's counterparty is the ORIGINAL construction lender or a THIRD-PARTY assignee who purchased the substitute mortgage.

What this means for you

HDFCs, developers, and title attorneys structuring phased affordable-housing sales

You can sever a single exempt HDFC construction loan mortgage into per-lot substitute mortgages, and carry buyer permanent-financing assumptions through extension/modification agreements, without triggering mortgage recording tax at any step — as long as the aggregate debt doesn't increase and the substitute mortgages remain properly structured as HDFC mortgages or supplemental instruments.

Individual homebuyers assuming permanent financing on an HDFC-developed unit

Your assumption of the seller's construction-era debt, converted to a permanent loan with new rate/term, generally won't trigger fresh mortgage recording tax — this is treated as a tax-exempt supplemental mortgage modification, not a brand-new taxable mortgage.

Common questions

Q: Does it matter whether the buyer assumes financing with the original lender or a new third-party lender who bought the mortgage?
A: No — the opinion confirms the same tax-free result applies whether the counterparty on the extension/modification agreement is the original construction lender/affiliate or a third-party assignee.

Q: What if the substitute mortgage or the assumption agreement DOES add new debt beyond the original construction loan balance?
A: That would fall outside this analysis — additional or further indebtedness beyond the original amount would trigger mortgage recording tax on the increase under standard Tax Law § 255 principles.

Q: Can other HDFCs or title companies rely on this specific opinion?
A: No. It binds the Department only as to this petitioner and these facts, though it applies the Department's established treatment of HDFC mortgages (see also Habitat for Humanity, TSB-A-00(4)R) and standard supplemental-mortgage regulations.

Citations and references

Statutes and regulations:

• Tax Law § 253 (mortgage recording tax on real property mortgages)
• Tax Law § 255.1(a) (supplemental/additional mortgage exemption where no new or further indebtedness is created)
• Private Housing Finance Law § 577(2) (HDFC mortgages exempt from mortgage recording tax)
• 20 NYCRR § 644.1(b)(9) (regulatory codification of the HDFC mortgage exemption)
• 20 NYCRR § 645.1(a) (definition of supplemental mortgage, including modifications adjusting terms or substituting a mortgagor/mortgagee, with Example 6 on interest-rate modification)

Prior opinions cited:

• Habitat for Humanity Housing Development Fund Company, Inc., TSB-A-00(4)R (November 20, 2000) (HDFC mortgages exempt under Private Housing Finance Law § 577(2))

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/mortgage_rec_ao_2001.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/mortgage/a01_4r.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-01(4)R
Mortgage Recording Tax
May 23, 2001

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M001030A

On October 30, 2000, the Department of Taxation and Finance received a Petition for
Advisory Opinion from the New York State Title Attorneys Bar Association, 260 Christopher Lane,
Staten Island, New York 10314.
The issues raised by Petitioner, the New York State Title Attorneys Bar Association, are:
(1)

Whether an exemption from the payment of the mortgage recording tax is applicable
by virtue of Section 255 of the Tax Law, where a recorded construction loan
mortgage given by a housing development fund company (HDFC) is severed to cover
different portions of the originally mortgaged premises and the HDFC executes two
or more substitute mortgages in favor of the original mortgagee, and the original
construction loan mortgage did not expressly contemplate or describe the severance
of the mortgage and the execution of replacement mortgages.

(2)

Whether an exemption from the payment of the mortgage recording tax is applicable
by virtue of Section 255 of the Tax Law, assuming the same facts as set forth in issue
(1) above, except the original construction loan mortgage expressly contemplates and
provides for the severance of the mortgage and the execution of replacement
mortgages.

(3)

Whether such exemption under Section 255 of the Tax Law will be allowed where
title to the portion of the premises subject to the substitute mortgage is transferred by
an HDFC to an individual purchaser and the purchaser simultaneously enters into an
extension and modification agreement with the HDFC’s mortgagee or its affiliate
whereby the purchaser assumes the obligation to repay the debt secured by the
substitute mortgage, in the form of a permanent loan, at a different interest rate and
terms of repayment.

(4)

Whether such exemption under Section 255 of the Tax Law will be allowed where
the substitute mortgage is first assigned to a third party lender and then the premises
is transferred and the purchaser enters into an extension and modification agreement
with the third party lender, whereby the purchaser assumes the obligation to repay the
debt secured by the substitute mortgage, in the form of a permanent loan, at a
different interest rate and terms of repayment.

Petitioner submits the following facts as the basis of this Advisory Opinion.

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TSB-A-01(4)R
Mortgage Recording Tax
May 23, 2001

HDFCs are organized pursuant to the provisions of Article XI of the Private Housing Finance
Law of the State of New York and Section 402 of the Not-For-Profit Corporation Law for the
primary purpose of assisting in and promoting the development of affordable housing, on a non­
profit basis, for persons and families of limited income, in areas where no adequate housing exists
for such persons and families, most often with the assistance, in the form of subsidies, from federal,
state and municipal governmental entities.
HDFCs often use the following program in order to secure financing for a government-aided
housing development project. The HDFC, as fee owner of the property, will subject its fee interest
in the project to a construction loan mortgage obtained by the project’s developer from an
institutional lender. There is no mortgage recording tax paid on this construction loan mortgage
because, pursuant to Section 577(2) of Article XI of the Private Housing Finance Law, the recording
of mortgages of an HDFC are exempt from the mortgage recording taxes imposed by and pursuant
to the authority of Article 11 of the Tax Law of the State of New York.
It is the intention of the HDFC and the project’s developer to make an arrangement with the
project construction lender to sever the construction loan mortgage into two or more substitute
mortgages executed by the HDFC in favor of the same original mortgagee. Accordingly, HDFC and
the original construction loan mortgagee will enter into a mortgage modification and severance
agreement. Pursuant to the terms of this agreement, the original construction loan mortgage will not
be satisfied of record. Rather, as each substitute mortgage is recorded, this agreement provides that
the premises described in the substitute mortgage will be deemed released from the lien of the
original construction loan mortgage. Further, as individual houses and lots are sold, the parties will
either:
1.

Transfer title to the portion of the premises subject to the substitute mortgage to an
individual purchaser and the purchaser will enter into an extension and modification
agreement with HDFC’s construction loan lender or its affiliate whereby the
purchaser assumes the obligation to repay the debt secured by the substitute
mortgage, in the form of a permanent loan, at a different interest rate and terms of
repayment; or

2.

Assign the substitute mortgage to a third party lender and then transfer title to the
portion of the premises subject to the substitute mortgage to an individual purchaser
who will simultaneously enter into an extension and modification agreement with the
third party lender, whereby the purchaser assumes the obligation to repay the debt
secured by the substitute mortgage, in the form of a permanent loan, at a different
interest rate and terms or repayment.

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TSB-A-01(4)R
Mortgage Recording Tax
May 23, 2001

With respect to both of the above scenarios, the aggregate amount of principal debt or
obligation secured or to be secured under any contingency by such substitute mortgages will equal
the unpaid balance of the amount secured by the construction loan mortgage.
Applicable Law and Regulations
Section 253 of the Tax Law imposes taxes on the recording of a mortgage of real property
in the State measured by the principal debt or obligation, which is, or under any contingency may
be, secured at the date of the execution thereof or at any time thereafter.
Section 255.1(a) of the Tax Law provides:
If subsequent to the recording of a mortgage on which all taxes, if any,
accrued under this article have been paid, a supplemental instrument or mortgage is
recorded for the purpose of correcting or perfecting any recorded mortgage, or
pursuant to some provision or covenant therein, or an additional mortgage is recorded
imposing the lien thereof upon property not originally covered by or not described
in such recorded primary mortgage for the purpose of securing the principal
indebtedness which is or under any contingency may be secured by such recorded
primary mortgage, such additional instrument or mortgage shall not be subject to
taxation under this article, except as otherwise provided in paragraph (b) of this
subdivision, unless it creates or secures a new or further indebtedness or obligation
other than the principal indebtedness or obligation secured by or which under any
contingency may be secured by the recorded primary mortgage, in which case, a tax
is imposed as provided by section two hundred and fifty-three of this chapter on such
new or further indebtedness or obligation.
Paragraph (9) of subdivision (b) of section 644.1 of the Mortgage Recording Tax Regulations
(20 NYCRR) provides that mortgages of housing development fund companies formed pursuant to
Article XI of the Private Housing Finance Law (Section 577(2) of the Private Housing Finance Law),
are exempt from the mortgage recording tax.
Section 645.1(a) of the Mortgage Recording Tax Regulations provides:
A supplemental mortgage is an additional instrument or mortgage which is
recorded subsequent to the recording and prior to the discharge or satisfaction of a
prior primary mortgage on which all taxes, if any, accrued under Article 11 of the
Tax Law have been paid, the terms of which make reference to the prior recorded
primary mortgage, and which is given and recorded:
*

*

*

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Mortgage Recording Tax
May 23, 2001

(5) for the purpose of modifying a prior recorded primary mortgage, for
reasons including but not limited to the following:
(i) adjusting the term for the payment of the debt secured by
the prior recorded primary mortgage;
(ii) changing the interest rate on the debt secured by the prior
recorded primary mortgage;
(iii) substituting a new mortgagor for the mortgagor;
(iv) substituting a new mortgagee for the mortgagee due to an
assignment of the mortgage;
(v) evidencing a change in the amount of debt or obligation
which is secured or which under any contingency may be secured by
the prior recorded primary mortgage.
Paragraph (b) of Section 645.1 of the Mortgage Recording Tax Regulations provides
examples of supplemental mortgages. Example 6 provides as follows:
Example 6: In 1985, a mortgage is given to Bank X by Mr. Smith. The note
secured by the mortgage provides for an adjustable rate of interest. In 1991
the terms of the note are amended to provide a fixed rate of interest and the
mortgage is modified accordingly. Such agreement is a supplemental
mortgage.
Opinion
Petitioner appropriately notes that mortgages of housing development fund companies
formed pursuant to Article XI of the Private Housing Finance Law are exempt pursuant to Section
577(2) of such law from payment of the mortgage recording tax (see Habitat for Humanity Housing
Development Fund Company, Inc., Adv Op Comm T&F, November 20, 2000, TSB-A-00(4)R).
Thus, with respect to issues (1) and (2) raised by Petitioner, it is concluded that the substitute
mortgages to be executed by HDFC to the original construction loan mortgagee are exempt from
payment of the mortgage recording tax. As a result, it is not necessary to determine whether the
provisions of Section 255 of the Tax Law would otherwise apply to the recording of the substitute
mortgages.
With respect to issues (3) and (4), it is noted that the substitute mortgages described by
Petitioner in issues (1) and (2) will be treated as the “recorded primary mortgage” upon which the

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Mortgage Recording Tax
May 23, 2001

proper tax, if any, has been paid, for purposes of Section 255 of the Tax Law. The agreements to
extend and modify the recorded primary mortgages as described by Petitioner clearly meet the
criteria for treatment as supplemental mortgages set forth in paragraph (5) of Section 645.1(a) of the
Mortgage Recording Tax Regulations. This conclusion is the same, whether the extension and
modification agreements are executed by the individual purchasers and the original construction loan
mortgagee or executed by the individual purchasers and the third party lender assignee of the
original construction loan mortgagee. In either situation, the assumption of the mortgage by the
individual purchasers, and extension and modification agreements will not be taxable, since the
agreements do not create or secure a new or further indebtedness.

DATED: May 23, 2001

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist III
Technical Services Bureau

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.