We closed a commercial mortgage loan where our borrower is a tax-exempt nonprofit. Our commitment letter said the borrower would reimburse us for all closing costs, including mortgage recording tax. We paid the special additional mortgage recording tax at closing -- can we now collect it back from the borrower under that contract clause, given the borrower's exempt status?

Plain-English summary

A commercial mortgage lender and a tax-exempt nonprofit borrower signed a commitment letter in which the borrower agreed to pay all the lender's closing costs and expenses, including mortgage recording tax, with that reimbursement obligation specifically stated to survive the closing. At closing, the lender paid the "special additional" mortgage recording tax — an extra 25 cents per $100 of principal debt under Tax Law § 253.1-a(a), on top of the base 50-cent tax — and then sought reimbursement from the borrower under the commitment letter. The borrower refused, arguing the statute itself requires the mortgagee (lender) to bear this specific tax when the borrower is a tax-exempt organization, and that obligation can't be shifted by private agreement. The lender's counsel (Cuddy and Feder) asked the Department to settle the dispute: can the special additional tax be "passed through" contractually, and if so, must the lender pay it upfront and then get reimbursed, or can the lender simply require the borrower to pay it directly at closing?

The Department sided with the borrower. Section 253.1-a(a) contains an explicit allocation rule: for property other than a 1-6 family owner-occupied residence, the special additional tax is normally paid by the MORTGAGOR — except where the mortgagor is a tax-exempt organization described in § 253.1-a(b) (organized on a nonprofit basis, no earnings inuring to any officer/director/member, exempt under IRC § 501(a)), in which case the tax flips to being paid by the MORTGAGEE instead. Citing State v. Intercounty Mortgagee Corp. (which held the special additional tax on improved residential property "cannot be passed on to the seller, real estate broker or other third person"), the Department held that this statutory allocation is not something the parties can override by private contract — even a commitment letter specifically providing for reimbursement and specifically drafted to survive closing. Because the statute assigned this specific tax to the lender given the borrower's exempt status, the lender could not shift that cost to the borrower and was not entitled to reimbursement.

What this means for you

Commercial mortgage lenders financing tax-exempt nonprofit borrowers

Budget for the special additional mortgage recording tax as a genuine cost of the loan when your borrower is a § 501(a) tax-exempt organization and the property isn't a small residential structure — you cannot recover it from the borrower through a reimbursement clause, no matter how the commitment letter or loan documents are drafted.

Nonprofit organizations borrowing against real property

If a lender's commitment letter or loan documents attempt to make you reimburse the special additional mortgage recording tax, you may have a basis to refuse that specific line item, since the statute itself assigns that tax to the lender when you're a qualifying tax-exempt organization.

Real estate attorneys drafting commitment letters and closing statements

General "borrower reimburses all closing costs" language doesn't override a specific statutory tax-allocation rule. If you're drafting for a lender financing an exempt-organization borrower, don't assume the special additional mortgage recording tax can be passed through just because your reimbursement clause is broadly worded.

Common questions

Q: Does this rule apply to the BASE mortgage recording tax too, or just the special additional tax?
A: This ruling addresses specifically the special additional tax under § 253.1-a(a). The base tax under § 253, subdivision 1, has its own separate allocation rules not addressed here.

Q: What if the property is a 1-6 family owner-occupied residence?
A: Different allocation rules apply under § 253.1-a(a) for small residential structures (mortgagee pays generally, with different exceptions) -- this ruling's fact pattern specifically involves property that is NOT a 1-6 family residence.

Q: Can a carefully drafted contract ever shift the special additional tax to an exempt-organization mortgagor?
A: Not according to this ruling -- the Department treated the statutory allocation as controlling regardless of contractual language, following State v. Intercounty Mortgagee Corp.'s holding that this tax cannot be passed on to third parties.

Q: Can another lender or borrower rely on this specific ruling?
A: No. It binds the Department only as to this petitioner and these facts, though the underlying statutory interpretation -- that § 253.1-a(a)'s allocation can't be contractually overridden -- is a generally applicable reading of the statute.

Citations and references

Statutes:

• Tax Law § 253.1-a(a) (special additional mortgage recording tax; statutory allocation of who pays)
• Tax Law § 253.1-a(b) (exempt organization definition -- nonprofit, no inurement, IRC § 501(a) exempt)

Case law cited:

• State v. Intercounty Mortgagee Corp., 87 A.D.2d 748, appeal dismissed 57 N.Y.2d 954, appeal denied 61 N.Y.2d 601 (special additional mortgage recording tax on improved residential property cannot be passed on to a third party)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/mortgage_rec_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/mortgage/a92_9r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92(9)-R
Mortgage
Recording Tax
November 6, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M920915A

On September 15, 1992, a Petition for Advisory Opinion was received from Cuddy and
Feder, 90 Maple Avenue, White Plains, New York 10601.
The issues raised by Petitioner, Cuddy and Feder, are:
1.

Whether any statutory or regulatory provisions enforced by the Department of
Taxation and Finance prevent a mortgagee from "passing through" or contractually
reassigning to the mortgagor the obligation to pay the special additional mortgage
recording tax imposed by Section 253.1-a(a) of the Tax Law, when the mortgage is
not on property improved or to be improved by a structure containing six residential
dwelling units or less and the mortgagor is exempt pursuant to Section 253.1-a(b) of
the Tax Law.

2.

Whether the mortgagee must pay the special additional mortgage recording tax first
and then be reimbursed by the mortgagor or whether the mortgagee can require the
mortgagor to pay the tax if it is concluded that the tax can be "passed through" in
issue "1" above.

Petitioner's client, a mortgage lender, and an exempt borrower (hereinafter the "mortgagor")
signed a commitment letter in which the mortgagor agreed to pay all of Petitioner's client's costs and
expenses in connection with a mortgage loan, including but not limited to, the mortgage recording
tax. At the closing, Petitioner's client looked to the mortgagor to pay the entire mortgage recording
tax, including the special additional tax imposed by Section 253.1-a(a) of the Tax Law. The
mortgagor in refusing to pay the special additional tax contended that the statute requires the special
additional tax to be paid by the mortgagee in instances where the mortgagor is an exempt
organization and, therefore, cannot be "passed through". Petitioner's client paid the special additional
tax and is seeking reimbursement from the mortgagor pursuant to the terms of the commitment letter,
the terms of which were specifically stated to survive the closing.
Section 253 of the Tax Law provides, in part, as follows:
Sec. 253. Recording tax.- - 1. A tax of fifty cents for each one hundred
dollars and each remaining major fraction thereof of 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 by a mortgage on real property situated within the
state recorded on or after the first day of July, nineteen hundred and six, is hereby
imposed on each such mortgage, and shall be collected and paid as provided in this
article. If the principal debt or obligation which is or by any contingency may be
secured by such mortgage recorded on or after the first day of July, nineteen hundred

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Mortgage
Recording Tax
November 6, 1992
and seven, is less than one hundred dollars, a tax of fifty cents is hereby imposed on
such mortgage, and shall be collected and paid as provided in this article.
1-a. (a) In addition to the tax imposed by subdivision one of this section,
there shall be imposed on each mortgage of real property situated within the state,
except mortgages wherein the mortgagee is a natural person or persons and the
mortgaged premises consist of real property improved by a structure containing six
residential dwelling units or less, each with separate cooking facilities, a special
additional tax of twenty-five cents for each one hundred dollars and each remaining
major fraction thereof of principal debt or obligation which is, or under any
contingency may be secured at the date of execution thereof or at anytime thereafter
by such mortgage. The tax, if any, imposed by this subdivision shall in cases of real
property principally improved or to be improved by one or more structures containing
in the aggregate not more than six residential dwelling units, each dwelling unit
having its own separate cooking facilities, be paid by the mortgagee, and such tax
shall not be paid or payable, directly or indirectly, by the mortgagor except as
otherwise provided in sections two hundred fifty-eight and two hundred fifty-nine of
this article and except such tax shall be paid in such cases by the mortgagor where
the mortgagee is an exempt organization described in paragraph (b) of this
subdivision. In all other cases, such tax shall be paid by the mortgagor except that the
tax shall be paid by the mortgagee where the mortgagor is an exempt organization
described in paragraph (b) of this subdivision. All of the provisions of this article
shall apply with respect to the special additional tax imposed by this subdivision to
the same extent as if it were imposed by said subdivision one of this section, except
as otherwise expressly provided in this article.
(b) An organization organized other than for profit which is operated on a
non-profit basis no part of the net earnings of which inures to the benefit of any
officer, director or member and which is exempt from federal income taxation
pursuant to subsection (a) of section five hundred one of the internal, revenue code
shall be exempt from the special additional tax imposed by this subdivision.
(emphasis added)
In interpreting Section 253.1-a(a) of the Tax Law, the Court in State v Intercounty Mortgagee
Corp., 1982, 87 A.D.2d 748, 448 N.Y.S.2d 675, appeal dismissed 57 N.Y.2d 954, 457 N.Y.S.2d
1028, 443 N.E.2d 496, appeal denied 61 N.Y.2d 601, 471 N.Y.S.2d 1029, 459 N.E.2d 1291 held that
the special additional mortgage recording tax with respect to improved real property must be paid
by lender and cannot be passed on to the seller, real estate broker or other third person.
Concerning issue "1", in the case of a mortgage where the mortgagor is an exempt
organization as described in Section 253.1-a(b) of the Tax Law, the special additional mortgage
recording tax shall be paid by the mortgagee and cannot be passed on to the mortgagor or any other

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Mortgage
Recording Tax
November 6, 1992
party in accordance with Section 253.1-a(a) of the Tax Law and the reasoning of the Court in State
v. Intercounty Mortgagee Corp., supra. Therefore in the instant case Petitioner's client cannot pass
through to the mortgagor the special additional tax imposed by Section 233.1-a(a) of the Tax Law.
With respect to issue "2", in accordance with the opinion reached in issue "1" above, the
special additional mortgage recording tax due on mortgages where the mortgagor is an exempt
organization cannot be passed on and must be paid by the mortgagee. Therefore, Petitioner's client
is not entitled to reimbursement from the mortgagor.

DATED: November 6, 1992

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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