We're a nonprofit local development corporation. Under the SBA 504 loan program, we plan to take a construction-phase mortgage from a borrower, immediately have it enforced by a private lender who's actually funding the advances, then take it back once permanent SBA financing kicks in. Is that mortgage exempt from mortgage recording tax through both phases?

Plain-English summary

This is the founding ruling on Greater Syracuse Business Development Corporation's (GSBDC) mortgage recording tax exemption, later cited in the Department's 1997 follow-up opinion (TSB-A-97(54)S, (7)R) that also covered GSBDC's sales tax exemption process. GSBDC is a Not-For-Profit Local Development Corporation, reincorporated under Not-For-Profit Corporation Law § 1411, that helps finance small-business projects in Onondaga and neighboring counties. Under the SBA's 504 Loan Program, GSBDC typically commits to providing 40% permanent financing once a construction project is complete (with a private lender providing 50% and the borrower 10%). GSBDC proposed to extend its involvement into the construction phase itself: at closing, it would take a promissory note and mortgage from the borrower for its 40% share, but fund the actual construction advances entirely through a 100% pre-closing "syndication" arrangement with a private lender. By private contract (though the note and mortgage were never formally reassigned), only the private lender could enforce them during construction. Once construction finished, GSBDC would use SBA-provided permanent financing to buy out the private lender's construction-phase position and modify the note and mortgage to permanent-financing terms.

GSBDC asked whether this whole structure — mortgage recorded to GSBDC, functionally enforced by a private lender during construction, then reverting to GSBDC's own permanent financing — stayed exempt from mortgage recording tax throughout. The Department said yes. Although Tax Law § 252 generally bars MRT exemptions arising from statutes other than the mortgage recording tax article, N-PCL § 1411(f) — a later, more specific enactment exempting the "income and operations" of § 1411 local development corporations from taxation — controls under the standard rule that a later specific statute overrides an earlier general one (Williamsburg Power Plant Corp. v. City of New York). Because GSBDC is the entity recording the mortgage (regardless of who is functionally advancing and enforcing the debt during the construction phase), the exemption isn't lost by the private-lender syndication arrangement or by the later reassignment back to GSBDC for permanent financing.

What this means for you

Local development corporations structuring SBA 504 or similar syndicated financing

You don't lose your § 1411(f) mortgage recording tax exemption just because a private lender is functionally funding and enforcing "your" mortgage during a construction phase, as long as you remain the recorded mortgagee. This lets an LDC participate earlier in a project's financing timeline (construction, not just permanent take-out) without generating extra recording tax exposure.

Private lenders participating in LDC-syndicated construction loans

The private contractual arrangement giving you exclusive enforcement rights over an LDC's recorded mortgage during construction doesn't need to be formalized as a recorded assignment to preserve the LDC's exemption — but be clear in your syndication documents about exactly when and how the LDC's interest converts to permanent financing, since that's the structure the Department examined here.

Accountants and small business tax professionals

This is the origin case for GSBDC's § 1411(f) exemption; the 1997 follow-up opinion (TSB-A-97(54)S, (7)R) explicitly relies on this ruling for the mortgage recording tax conclusion while separately addressing the harder sales-tax question for GSBDC's sale/leaseback, installment-sale, and lease/leaseback financing structures.

Common questions

Q: Does having a private lender actually fund and enforce the mortgage during construction defeat the LDC's exemption?
A: No. The exemption follows GSBDC as the recorded mortgagee under N-PCL § 1411(f), regardless of the private syndication arrangement giving the private lender functional enforcement rights during the construction phase.

Q: Does modifying the note and mortgage for permanent financing terms after construction create new mortgage recording tax exposure?
A: The ruling doesn't separately analyze that step in detail, but the overall conclusion is that the structure -- construction phase through permanent takeout -- stays exempt because GSBDC's underlying § 1411(f) exemption applies throughout.

Q: Can another local development corporation rely on this specific ruling?
A: No. It binds the Department only as to this petitioner and these facts, though the underlying § 1411(f) exemption is generally available to similarly organized § 1411 local development corporations.

Citations and references

Statutes:

• Tax Law § 252 (general rule against MRT exemptions arising from other statutes)
• Not-For-Profit Corporation Law § 1411(c) (local development corporation powers, including borrowing and mortgaging property)
• Not-For-Profit Corporation Law § 1411(f) (income and operations of § 1411 corporations exempt from taxation)

Case law and prior opinions cited:

• Williamsburg Power Plant Corp. v. City of New York, 255 A.D. 214, aff'd 280 N.Y. 551 (later specific enactment governs earlier general enactment)
• First National Bank and Trust Co. v. Village of Saltaire, 256 A.D. 156
• Empire State Certified Development Corporation, TSB-A-93(13)-R (June 29, 1993) (prior § 1411 local development corporation MRT exemption precedent)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/mortgage_rec_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/mortgage/a95_16r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (16) - R
Mortgage Recording Taxes
December 22, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M950802C

On August 2, 1995, a Petition for Advisory Opinion was received from Greater Syracuse
Business Development Corporation, 572 South Salina Street, Syracuse, New York, 13202-3320.
The issue raised by Petitioner, the Greater Syracuse Business Development Corporation
("GSBDC"), is whether construction loan mortgages recorded by the GSBDC are exempt from the
mortgage recording tax imposed by Article 11 of the New York Tax Law, where the mortgages are
assigned immediately after recording to a private lender for the duration of the construction phase,
but then reassigned to GSBDC after the completion of the construction phase for the remainder of
the term.
GSBDC is a not-for-profit local development corporation reincorporated under Section 1411
of the Not-For-Profit Corporation Law. GSBDC'S operations include making loans to businesses in
Onondaga and contiguous counties secured by, among other things, mortgages on real property
situated within New York State. These mortgages are recorded in the County Clerk's office in which
the real property is situated.
In furtherance of its corporate purposes and powers, GSBDC participates in permanent
financing of construction loans pursuant to the United States Small Business Administration's (SBA)
504 Loan Program (the "Program").
The Program was established by the SBA to make available to local development companies,
like GSBDC, funds to loan to eligible business concerns. The Program provides long-term
permanent financing to these businesses in participation with private lenders, and requires an equity
contribution on the part of the borrower. Typically, the private lender provides permanent financing
in an amount not to exceed fifty percent (50%) of the total project cost, with forty percent (40%)
provided by the local development company and ten percent (10%) provided by the borrower.
However, variations of the 50-40-10 allocation are permitted under certain circumstances.
Pursuant to the loan program, GSBDC commits to lending forty percent (40%) of the total
cost, once the construction phase is complete. GSBDC, in furtherance of its corporate purposes and
powers, plans to extend its participation in construction loans to Program borrowers by becoming
involved, during the construction phase, in lending the amount (forty percent) for which it would
ultimately provide permanent financing. GSBDC proposes to accomplish this as follows.

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Mortgage Recording Taxes
December 22, 1995
At the closing of the construction loans, in exchange for its commitment, GSBDC would take
a promissory note (the "Note") from the borrower for an amount equal to forty percent (40%) of the
total project cost. The Note would be secured by a mortgage granted by the borrower to GSBDC (the
"Mortgage"). The construction loan agreement (the "Loan Agreement") would require GSBDC to
advance funds to the borrower throughout the construction phase of the project up to the amount of
its construction loan commitment with the funds provided to it by a participating lender through a
one hundred percent (100%) pre-closing syndication of the loan with the lender. At the closing,
GSBDC would effectively assign the Loan Agreement to the private lender. Advances under the
Loan Agreement would be made by the private lender, directly or through GSBDC. Pursuant to a
contract between GSBDC and the private lender, the Note and Mortgage would be directly
enforceable only by the private lender even though the Note and Mortgage are never formally
assigned to the private lender. The private lender would also take a separate note and mortgage for
a portion of the remaining total project cost, typically fifty percent (50%). The remaining ten percent
(10%) of the project cost would be provided by the borrower.
Upon completion of the construction phase, GSBDC would, through funding provided to it
by the SBA and pursuant to its permanent financing commitment, take out the private lender for the
forty percent (40%) of the total project costs that it lent through syndication. There would also be
a modification of the Note and Mortgage to reflect permanent financing terms.
Section 252 of the Tax Law provides, with certain exceptions, that "[n]o mortgage of real
property situated within this state shall be exempt, and no person or corporation owning any debt or
obligation secured by mortgage of real property situated within this state shall be exempt, from taxes
imposed by this article by reason of anything contained in any other statute..."
Section 1411 of the Not-for-Profit Corporation Law authorizes the creation of local
development corporations. Subdivision (c) of section 1411 grants the following powers to local
development corporations:
to construct, acquire, rehabilitate and improve for use by others industrial or
manufacturing plants in the territory in which its operations are principally to be
conducted, to assist financially in such construction, acquisition, rehabilitation and
improvement, to maintain such plants for others in such territory, to disseminate
information and furnish advice, technical assistance and liaison with federal, state
and local authorities with respect thereto, to acquire by purchase, lease, gift, bequest,
devise or otherwise real or personal property or interests therein, to borrow money
and to issue negotiable bonds, notes and other obligations therefor, and
notwithstanding section 510 (Disposition of all or substantially all assets) without
leave of the court, to sell, lease, mortgage or otherwise dispose of or encumber any
such plants or any of its real or personal property or any interest therein upon terms
as it may determine and, in connection with loans from the New York job
development authority, to enter into covenants and agreements and to comply with
all terms, conditions and provisions thereof, and otherwise to carry out its corporate
purposes and to foster and encourage the location or expansion of industrial or
manufacturing plants in the territory in which the operations of such corporation are

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TSB-A-95 (16) - R
Mortgage Recording Taxes
December 22, 1995
principally to be conducted, provided, however, that no such corporation shall
attempt to influence legislation by propaganda or otherwise, or participate or
intervene, directly or indirectly, in any political campaign on behalf of or in
opposition to any candidate for public office.
Section 1411(f) of such law provides that "[t]he income and operations of corporations
incorporated and reincorporated under this section shall be exempt from taxation."
Notwithstanding the language of Section 252 of the Tax Law, it is noted that claims for
exemption from the mortgage recording tax by various public authorities in New York State based
on tax exemptions provided in their creating statutes have been consistently allowed. This position
is consistent with the general rule that where a conflict or variance exists between two enactments
relating to the same general subject matter, the later special statute takes precedence against a general
statute and the prior general statute must yield to the later specific or special statute. (Williamsburg
Power Plant Corp. v City of New York, 255 App Div 214, affd 280 NY 551; First National Bank and
Trust Co. v. Village of Saltaire, 256 App Div 156 and Empire State Certified Development
Corporation, Adv Op Comm T&F, June 29, 1993, TSB-A-93(13)-R).
In accordance with the rationale set forth in Williamsburg Power Plant Corp. v City of New
York, supra, First National Bank and Trust Co. v. Village of Saltaire, supra, and Empire State
Certified Development Corporation supra, since Petitioner is reincorporated under Section 1411 of
the Not-For-Profit Corporation Law, and Section 1411(f) provides that the income and operations
of corporations incorporated or reincorporated under such section shall be exempt from taxation, the
recording of mortgages given to Petitioner is exempt from the mortgage recording tax imposed by
Article 11 of the Tax Law. This conclusion is unaltered by the fact that the mortgages are or may be
assigned immediately after recording to a private lender for the duration of the construction phase
of the Project, but then reassigned to Petitioner after the completion of the construction phase for the
remainder of their term.

DATED: December 22, 1995

/s/
DORIS S. BAUMAN
Director
Technical Services Bureau

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