We're a bank co-financing small-business real estate projects under the SBA 504 Loan Program alongside a certified development company (CDC) organized as a section 1411 not-for-profit local development corporation. Because the CDC can't fund its share until SBA debentures sell, we plan to temporarily hold its second mortgage ourselves and later assign it back. Is any part of this structure -- the CDC's mortgage, or the assignments between us -- subject to mortgage recording tax?

Plain-English summary

The petitioner is a bank that participates in the federal SBA 504 Loan Program alongside certified development companies (CDCs). In a typical 504 deal, a small business borrower acquires or improves real property, funded roughly 50% by the bank's own loan (secured by a first mortgage, "Petitioner's Mortgage"), up to 40% by the CDC's loan (secured by a second mortgage, "CDC Mortgage," ultimately funded through SBA debenture sales), and at least 10% by the borrower's own equity or subordinated debt.

Because SBA debentures for a project can't be sold until after construction/acquisition is complete, the CDC frequently lacks the funds to actually make its loan during that "Interim Period." So the bank and CDC use a workaround: the CDC enters into and records the CDC Mortgage as mortgagee, then immediately assigns it to the bank, which advances the funds to the borrower on the CDC's behalf. The bank holds the assigned CDC Mortgage until the project reaches sufficient completion or the CDC raises the SBA funds, at which point the bank reassigns the CDC Mortgage back to the CDC (which then reimburses the bank), or the CDC simply pays off the loan and enters a fresh mortgage directly with the borrower.

Article 11 of the Tax Law (§ 253) taxes the act of recording a mortgage (not the mortgage itself), and none of its enumerated exemptions applied here. But Not-For-Profit Corporation Law § 1411(f) separately exempts "the income and operations" of section 1411 corporations from taxation — creating a conflict with Tax Law § 252's general no-exemption-from-other-statutes rule that is resolved, per longstanding case law (Williamsburg Power Plant Corp. v. City of New York; First National Bank and Trust Co. v. Village of Saltaire), in favor of the later, more specific 1969 LDC exemption over the 1909 MRT provisions. So the CDC Mortgage's initial recording by the CDC is exempt from MRT. Because the correct (zero) tax was properly accounted for at that initial recording, neither the assignment from CDC to the bank nor the later reassignment from the bank back to the CDC creates a new taxable mortgage under Tax Law § 255 — assigning an already-recorded mortgage doesn't itself trigger MRT. The Department also confirmed that Tax Law § 258 (which can bar enforcement of an unpaid-tax mortgage) doesn't block enforcement of the CDC Mortgage here, since no MRT was ever properly due on it. The bank's own first mortgage to the borrower, by contrast, remains fully taxable throughout — this exemption applies only to the CDC's portion of the financing.

What this means for you

Banks and CDCs structuring SBA 504 interim financing

The "warehousing" arrangement — where a bank temporarily holds an assigned CDC mortgage during the SBA debenture-funding gap — doesn't create a taxable event at assignment or reassignment, as long as the CDC's own mortgage was properly exempt (or properly taxed) when first recorded.

Small business borrowers under the 504 program

Expect MRT on your bank's first mortgage (based on that loan amount), but not on the CDC's second mortgage if the CDC is a genuine section 1411 local development corporation.

Common questions

Q: Does the bank's own first mortgage also get this exemption?
A: No — only the CDC's mortgage (and its assignments) are exempt; the bank's first mortgage to the borrower is fully subject to MRT as an ordinary commercial mortgage.

Q: Does assigning the CDC Mortgage to the bank, or back again, trigger new tax?
A: No — assigning an already-recorded mortgage doesn't create a new taxable mortgage under Tax Law § 255, as long as the correct tax was paid (or properly exempt) when the mortgage was first recorded.

Q: Can other banks or CDCs rely on this specific opinion?
A: No. It binds the Department only as to this petitioner and these facts, though it's consistent with the Department's established treatment of section 1411 LDCs (see TSB-A-08(1)R).

Citations and references

Statutes and regulations:

• Tax Law § 253 (mortgage recording tax on the act of recording, not the mortgage itself)
• Tax Law § 252 (no exemption by reason of any other statute, absent conflict resolution via later specific enactment)
• Tax Law § 255 (assignment of a recorded mortgage does not create a new taxable mortgage, if correct tax was paid on the original recording)
• Tax Law § 258 (mortgage enforceability tied to MRT payment; inapplicable where recording was properly exempt)
• Not-For-Profit Corporation Law § 1411(f) ("income and operations" of section 1411 corporations exempt from taxation)

Case law and prior opinions cited:

• Franklin Society for Home Building and Savings v. Bennett, 282 N.Y. 79 (1939); Matter of Silberblatt, Inc. v. Tax Comm., 5 N.Y.2d 635 (1959) (MRT taxes the act of recording, not the instrument)
• Hotel Waldorf Astoria Corp. v. State Tax Commission, 86 A.D.2d 330 (3d Dep't 1982); City of New York v. Tully, 88 A.D.2d 701 (3d Dep't 1982) (common-law state-agency immunity background)
• Williamsburg Power Plant Corp. v. City of New York, 255 A.D. 214 (2d Dep't 1938), aff'd 280 N.Y. 551 (1939); First National Bank and Trust Co. v. Village of Saltaire, 256 A.D. 156 (2d Dep't 1939) (later specific enactment governs earlier general enactment)
• TSB-A-09(1)C, TSB-A-08(1)R, TSB-A-02(6)R (other recent opinions on section 1411 LDC MRT exemption)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/mortgage_rec_ao_2009.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/mortgage/a09_2r.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-09(2)R
Mortgage Recording Tax
August 4, 2009

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M090323A

The petitioner, name redacted (Petitioner), asks whether the mortgage recording taxes imposed by
Article 11 of the Tax Law and Chapter 26 of the New York City Administrative Code (collectively, the
"MRT") will apply to the recording of a mortgage encumbering New York real property, in each instance,
where the facts are as described below.
We conclude that the transactions described are exempt from the MRT.
Facts
Petitioner is a bank that makes loans in conjunction with projects that also qualify for financing
under the 504 Loan Program, administered by the U.S. Small Business Administration (SBA) in conjunction
with certified development companies (CDCs). In this case, the CDC is a domestic not-for-profit local
development corporation incorporated or reincorporated under §1411 of the New York Not-For-Profit
Corporation Law.
Under the 504 Loan Program, a project typically involves the acquisition or lease of real property by
a small business (the Borrower) and, frequently, construction, renovation or other improvement of the real
property. In a typical financing under the 504 Loan Program that is the subject of this request, Petitioner will
lend the Borrower (“Petitioner’s Loan”) at least 50% of the cost of the acquisition, improvements and certain
soft costs associated with the project (“Project Costs”) and secure the note with a first mortgage on the
property (“Petitioner’s Mortgage”). The CDC, in reliance on funds to be provided ultimately by the SBA
through the 504 Loan Program, will lend up to 40% of the Project Costs (“CDC Loan”) and secure the note
by a second mortgage on the property ("CDC Mortgage"). Although they are secured by the same property,
Petitioner’s Mortgage and the CDC Mortgage are separate and unrelated instruments. The Borrower will
provide at least 10% of the Project Costs in the form of equity or subordinated debt.
The funding for the CDC Loan typically is obtained from the sale of debentures by the SBA.
However, the sale of debentures with respect to a project cannot take place until after the acquisition and,
where applicable, the improvements on the real property are complete. As a result, in many cases the CDC
does not have the financial ability or the authority to fund all, or in some instances any portion, of the CDC
Loan during the period ("Interim Period") between the commencement of the project and the point in time
when the CDC project is completed. In other words, unless and until the CDC receives the proceeds from
the sale of the debentures from the SBA, it is unable to fund the CDC Loan.
To allow the Project to proceed under these circumstances, the parties will implement the following,
referred to herein as the "Proposed Loan Structure." Petitioner will enter into and fund Petitioner’s Loan,
and Petitioner will record Petitioner’s mortgage which is subject to the MRT. CDC will enter into the CDC
Loan and the CDC Mortgage with the Borrower and be named mortgagee, and then assign the CDC
Mortgage to Petitioner. Petitioner will advance the funds secured by the CDC Mortgage to the Borrower.
CDC or one of its agents will record the CDC mortgage and then record the assignment of that mortgage.
Petitioner will hold the recorded CDC Mortgage until the Project reaches the requisite stage of completion or

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TSB-A-09(2)R
Mortgage Recording Tax
August 4, 2009

CDC has raised the requisite funds, at which time Petitioner will assign the CDC Mortgage and related notes
to CDC, and CDC will pay to Petitioner the amount advanced by Petitioner to fund the CDC Loan secured
by the CDC Mortgage. Alternatively, CDC may simply pay off the CDC Loan secured by the CDC
Mortgage held by Petitioner and enter into a new mortgage with Borrower.
Analysis
Article 11 of the New York State Tax Law (“Tax Law”) imposes taxes on the recording of mortgages
on real property, based on the principal debt or obligation secured by the mortgage being recorded. Tax Law
§253. Chapter 26 of the New York City Administrative Code provides similarly for property situated within
New York City. The tax is imposed pursuant to Section 253 of the Tax Law on the act of recording a
mortgage, rather than on the mortgage itself. Franklin Society for Home Building and Savings v. Bennett,
282 N.Y. 79 (1939); Matter of Silberblatt, Inc. v. Tax Comm., 5 N.Y.2d. 635 (1959).
The MRT statutes enumerate certain exemptions (Tax Law §§252, 252-a, 253.3), none of which is
applicable here, but other exemptions arise under the common law, and still others apply by reason of statutory
provisions outside of the MRT statutes. It is well established that State agencies enjoy immunity from taxation,
independent of the statutory exemptions, for property used in the public interest, on the theory that imposition
of a tax upon a mortgage held by a State agency is tantamount to a tax upon the agency itself in violation of
its immunity from taxation. Hotel Waldorf Astoria Corp. v. State Tax Commission, 86 A.D.2d 330, 334;
451 N.Y.S.2d 261 (1982).1 In Hotel Waldorf-Astoria Corp., acknowledging that a $45 million mortgage
secured by the Waldorf-Astoria hotel was exempt from the MRT because the mortgagee (the New York State
Employees’ Retirement System) was a New York State agency, the court stated: “as a State agency, the
Retirement System enjoys an immunity from taxation independent of the statutory exemptions listed in
Section 252 of the Tax Law.” This principle has been applied in exempting from the MRT the recording of
mortgages on property for which the legal title is held by an industrial development agency and the beneficial
ownership is held by a non-exempt private party (see 1982 Opinion of the State Comptroller No. 82-188, p.
240, and numerous Advisory Opinions issued by this Department over the years).2
Furthermore, when CDC is a party to a mortgage and records it, a clear statutory exemption from the
MRT is provided by §1411(f) of the New York Not-For-Profit Law, which says that “[t]he income and operations
of a corporation incorporated or reincorporated under this section shall be exempt from taxation.” This creates
an inconsistency between the Not-for-Profit Law and the provision in §252 of the Tax Law that states that
no mortgage of real property in New York and no person or corporation owning any debt secured by a
mortgage on real property situated in New York is exempt from the taxes imposed by Article 11 of the Tax
Law by reason of anything contained in any other statute. The allowance of exemptions in cases where an
entity has a specific exemption granted in statute outside of Article 11 is consistent with the principle that,
when a conflict exists between two statutes or laws that relate to the same subject matter, the later specific
enactment governs the earlier general enactment. This position has been adopted by both the courts and this
Department. Williamsburg Power Plant Corp. v City of New York, 255 A.D. 214, 7 N.Y.S.2d 326 (2nd Dep't
1938), aff'd 280 N.Y. 551 (1939); First National Bank and Trust Co. v. Village of Saltaire, 256 A.D. 156, 9
N.Y.S.2d 103 (2nd Dep't 1939).
Since the pertinent provisions of the MRT were enacted in 1909, they must yield to the exemption
provisions contained in the 1969 law creating CDCs. Thus, the MRT does not apply where CDC as mortgagee
records the CDC mortgage. Neither the recording of the assignment of the CDC Mortgage from CDC to
1
2

Also see City of New York v. Tully, 88 A.d2d 701, 451 N.Y.S.2d 2654 (3rd Dept. 1982).

For recent Advisory Opinions on this issue, see TSB-A-09(1)C, TSB-A-08(1)R, and TSB-A-02(6)R.

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TSB-A-09(2)R
Mortgage Recording Tax
August 4, 2009

Petitioner, nor the eventual assignment of the CDC Mortgage by Petitioner to CDC would be subject to the
MRT. The act of assigning a recorded mortgage, in and of itself, does not create a new mortgage subject
to the MRT, provided that the correct MRT has been paid on the recording of the mortgage itself. Tax
Law §255. Finally, because the recording of the CDC Mortgage by CDC is exempt from the MRT, §258 of
the Tax Law does not preclude the enforcement of the CDC Mortgage, notwithstanding that no MRT was
paid on its recording.

DATED: August 4, 2009

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion.