An industrial development agency's tax-exempt construction mortgage on our shopping mall is being converted to permanent financing -- we're terminating our installment sale agreement, taking title ourselves, having the lenders assigned to new permanent lenders, and consolidating and amending the mortgage. Does converting from construction to permanent financing this way stay exempt from mortgage recording tax?

Plain-English summary

In December 1992, the County of Westchester Industrial Development Agency acquired land in White Plains, New York to build an enclosed regional shopping mall for Fashion Mall Partners, L.P. Construction was financed with two mortgages — a Building Loan Mortgage and an Indirect Costs Mortgage, together capped at $160 million — given by the Agency (as a tax-exempt state industrial development agency) to a syndicate of banks, with no mortgage recording tax paid at recording, as is standard for IDA financings. Under a companion Installment Sale Agreement, Fashion Mall Partners made payments covering the Agency's debt service, but the Agency retained title until its mortgage obligations were satisfied.

As the mall neared completion in 1995, Fashion Mall Partners arranged permanent financing (between $145 million and $155 million from new lenders) to replace the construction loan and fund tenant allowances. To accomplish this, Fashion Mall Partners would exercise its right under the Installment Sale Agreement to terminate it, causing the Agency to transfer title to the project directly to Fashion Mall Partners and be released from the mortgage. At the same time, the existing construction lenders would assign the mortgage to the new permanent lenders, and the mortgage would be amended — consolidating the Building Loan Mortgage and Indirect Costs Mortgage into one, with a new term and interest rate — without discharging any of the underlying debt and without increasing the maximum secured amount.

The Department confirmed the amended, consolidated mortgage was exempt from mortgage recording tax as a "supplemental mortgage" under Tax Law § 255.1(a). The mortgage recording tax regulations (20 NYCRR § 645.1(a)) specifically list several situations that qualify as tax-free supplemental mortgages, including consolidating multiple prior mortgages into a single lien, adjusting the loan term, changing the interest rate, and substituting a new mortgagor or mortgagee due to an assignment — as long as no new or further indebtedness is created beyond what the original mortgage secured (citing City of New York v. Procaccino and Brodsky v. Murphy, which separately held that consolidating existing debt, extending a maturity date, or raising an interest rate doesn't itself create a "new" mortgage). The Department also confirmed Real Property Law § 275's certificate-of-discharge requirement — designed to stop taxpayers from reviving a "dormant" satisfied mortgage to avoid paying tax on a genuinely new loan — didn't apply here, because the property continuously secured a bona fide debt throughout the transition (first to the construction lender, then to the permanent lender), consistent with the Department's own 1989 guidance (TSB-M-89(6.1)-R) that replacing a construction loan with permanent financing doesn't trigger § 275 even if the obligor also changes.

What this means for you

Developers converting IDA construction financing to permanent financing

Terminating an Installment Sale Agreement, taking title directly, having lenders assigned, and consolidating/amending the mortgage into permanent-financing terms can all be done without new mortgage recording tax — as long as the maximum secured amount doesn't increase and the debt is never actually discharged along the way.

Construction and permanent lenders on IDA-financed projects

The "no discharge, no increase" rule is the whole test. Structure the assignment and amendment carefully so the existing debt is understood to continue seamlessly (not be paid off and re-lent), and document that the maximum secured amount in the amended mortgage doesn't exceed what the original mortgage already covered.

Real estate attorneys and title insurers

This ruling is a clean worked example of § 645.1(a)'s consolidation and mortgagor/mortgagee-substitution provisions operating together in a single transaction, plus confirmation that Real Property Law § 275's anti-dormant-mortgage rule doesn't get triggered by a genuine construction-to-permanent conversion — useful precedent to cite for similar IDA-to-permanent-financing refinancings.

Common questions

Q: Does transferring title from the IDA to the developer, as part of terminating the installment sale agreement, trigger new mortgage recording tax on its own?
A: No -- the ruling's focus is on the mortgage itself; the property continues to secure the same bona fide debt throughout the title transfer, construction lender-to-permanent lender assignment, and mortgage amendment.

Q: Can the interest rate or term change without creating a new taxable mortgage?
A: Yes, per 20 NYCRR § 645.1(a)(5) and case law (Brodsky v. Murphy) — adjusting the term or interest rate on already-secured debt doesn't create a new mortgage for recording tax purposes.

Q: Would this analysis change if the maximum secured amount increased as part of the refinancing?
A: Yes. If the indebtedness secured by the lien were increased (or the lien terminated and a new one created), mortgage recording tax would be due on the increase, per Matter of Rednow Realty Corp. v. Tully.

Q: Can another IDA-financed project rely on this specific ruling?
A: No. It binds the Department only as to this petitioner and these facts, though the underlying construction-to-permanent-financing exemption mechanics are generally available to similarly structured IDA projects.

Citations and references

Statutes and regulations:

• Tax Law § 253 (mortgage recording tax imposition, measured by principal debt secured)
• Tax Law § 252 (general rule against MRT exemptions arising from other statutes)
• Tax Law § 255.1(a) (supplemental mortgage treatment)
• 20 NYCRR § 645.1(a) (supplemental mortgage regulations -- consolidation, term/rate changes, mortgagor/mortgagee substitution)
• Real Property Law § 275 (certificate of discharge of mortgage requirement)
• Real Property Law § 275(2)(b) (bona fide continuing debt exception)
• TSB-M-89(6.1)-R (Aug. 3, 1989) (construction-to-permanent-financing replacement doesn't trigger § 275, even with a change in obligor)

Case law cited:

• City of New York v. State Tax Commission, 130 A.D.2d 890 (no additional tax on supplemental mortgage if secured amount unchanged)
• Matter of Rednow Realty Corp. v. Tully, 72 A.D.2d 621 (tax due on increase if indebtedness reduced or lien terminated)
• City of New York v. Procaccino, 46 A.D.2d 594 (supplemental mortgage exempt if it consolidates existing debt without a new principal obligation)
• Brodsky v. Murphy, 26 A.D.2d 225, aff'd 20 N.Y.2d 282 (extended maturity date, new payment method, and higher interest rate don't create a new mortgage)

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_6r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (6)R
Mortgage Recording Taxes
July 6, 1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M950315A

On March 15, 1995, a Petition for Advisory Opinion was received from Fashion Mall
Partners, L.P., c/o The O'Connor Group, 399 Park Avenue, 25th Floor, New York, NY 10022.
The issue raised by Petitioner, Fashion Mall Partners, L.P., is whether an amended mortgage
to be presented for recording by Petitioner in connection with a refinancing transaction will be
exempt from the mortgage recording taxes imposed by Article 11 of the Tax Law.
Petitioner is a Delaware limited partnership whose general partner is O'Connor Fashion Mall
Partners, a New York general partnership.
In December 1992, the County of Westchester Industrial Development Agency, an industrial
development agency created pursuant to the New York State Industrial Development Agency Act
(the "Agency"), acquired certain land and improvements located in White Plains, New York, for the
purpose of constructing thereon an enclosed regional shopping mall (collectively, the "Project"). The
Agency obtained construction financing for the Project pursuant to a Building Loan Agreement dated
as of December 30, 1992, by and among Bank of Montreal, New York Branch, the Sumitomo Bank,
Limited, New York Branch, Bayerische Hypothoken-Und Wechsel-Bank Aktiengesellschaft, New
York Branch, and Credit Lyonnais, New York Branch (collectively, the "Existing Lenders"), the
Agency and Petitioner. The Agency also obtained construction financing for the Project pursuant to
an Indirect Costs Loan Agreement dated as of December 30, 1992, by and among the Existing
Lenders, the Agency and Petitioner. The Building Loan Agreement and the Indirect Costs Loan
Agreement provide that the Existing Lenders will make advances to the agency from time to time
to fund construction costs for the Project up to a maximum aggregate loan amount of $160,000,000.
As of the date hereof, a total of $114,832,192 has been borrowed by the Agency, which obligation
is evidenced by a Building Loan mortgage Note in the current principal amount of $95,590,052 and
an Indirect Costs Loan Mortgage Note in the current principal amount of $19,242,140. Both the
Building Loan Mortgage Note and the Indirect Costs Loan Mortgage Note have a five-year term and
are secured by a first mortgage on the real property comprising the Project created pursuant to the
Building Loan Mortgage, Assignment of Leases and Rents and Security Agreement (the "Building
Loan Mortgage") dated as of December 30, 1992, between the Agency and Petitioner in favor of the
Existing Lenders, and the Indirect Costs Loan Mortgage, Assignment of Leases and Rents and
Security Agreement (the "Indirect Costs Mortgage") dated as of December 30, 1992, between the
Agency and Petitioner in favor of the Existing Lenders, (collectively, the "Mortgage"). The
maximum principal amount which is or which under any contingency may be secured by the
Mortgage is $160,000,000.

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Mortgage Recording Taxes
July 6, 1995
As a State industrial development agency, the Agency was exempt from mortgage recording
tax with respect to the recording of the Mortgage. Consequently, no mortgage recording tax was paid
when the Mortgage was recorded.
Pursuant to an Installment Sale Agreement dated as of December 30, 1992, by and between
the Agency and Petitioner (the Installment Sale Agreement"), Petitioner agreed to purchase the
Agency's right, title and interest in and to the Project for a nominal amount. Pursuant to the
Installment Sale Agreement, Petitioner pays the Agency sufficient amounts to meet the Agency's
obligations to the Existing Lenders under the Mortgage. Title to the Project will not pass to Petitioner
until the Agency has been released from all its obligations under the Mortgage.
The Project is close to completion and the grand opening of the Project is presently scheduled
to occur later this month. The parties intended to refinance the construction loan with permanent
financing shortly after the grand opening on the terms contemplated by the Mortgage Loan
Application and Agreement, between Petitioner and certain lenders (collectively referred to as the
"New Lenders"). Under the Mortgage Loan Application and Agreement, the New Lenders will lend
a minimum of $145,000,000 and a maximum of $155,000,000, as determined by Petitioner in a
notice to the New Lenders to be given approximately two weeks prior to closing. It is expected that
the borrowing under the Mortgage Loan Application and Agreement would be used to refinance the
existing construction loan and to establish an escrow account to fund tenant allowances for the
Project.
To accomplish the refinancing of the construction loan, Petitioner intends to exercise its right
under Section 11.1 of the Installment Sale Agreement to terminate the Installment Sale Agreement,
as a result of which the Agency will transfer all of its right, title and interest in and to the Project to
Petitioner. Concurrently with the transfer of title to the Project to Petitioner, the Existing Lenders
will assign the Mortgage and related documentation to the New Lenders and the Agency will be
released from all of its obligations under the Mortgage. Thereafter, the New Lenders and Petitioner
will amend the Mortgage and related documentation to reflect certain changes, including the
consolidation of the Building Loan Mortgage and the Indirect Costs Mortgage, a new term and a new
interest rate (the Mortgage as so amended hereinafter is referred to as the "Amended Mortgage"). At
no point will any of the indebtedness secured by the Mortgage be discharged and the maximum
aggregate principal amount secured by or which under any contingency may be secured by the
Mortgage will not be increased as a result of such amendment.
Petitioner submitted copies of the Building Loan Agreement, the Indirect Costs Loan
Agreement, the Building Loan Mortgage Note, the Indirect Costs Loan Mortgage Note, the Building
Loan Mortgage, the Indirect Costs Loan Mortgage, the Installment Sale Agreement, the Mortgage
Loan Application and Agreement as part of the Petition for Advisory Opinion.
Subdivisions 1, 1-a and 2 of Section 253 of the Tax Law impose 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.

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Mortgage Recording Taxes
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Section 252 of the Tax Law provides, with certain exceptions, that "no 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 255.1(a) of the Tax Law provides, in part, as follows:
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 of 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. (emphasis added)
Section 645.1(a) of the Mortgage Recording Taxes Regulations provides as follows:
Section 645.1 Supplemental mortgages. [Tax Law, 255] (a) 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:
(1) for the purpose of correcting or perfecting such prior recorded primary
mortgage;
(2) pursuant to some provision or covenant in such prior recorded primary
mortgage;
(3) for the purpose of providing additional or further security for the payment
of the principal debt or obligation secured by the prior recorded primary mortgage by
spreading the lien of the prior recorded primary mortgage to additional real property
or by imposing a new lien on such additional real property (see section 645.2[c], [d],
[e] or [f] of this Part); or

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Mortgage Recording Taxes
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(4) for the purpose of coordinating or consolidating the liens of prior
recorded primary mortgages to form a single and coordinate equal lien; or
(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; or
(6) for the purpose of severing the lien(s) of a prior recorded
primary mortgage or mortgages into separate liens.
0nce a mortgage has been given and recorded, the recorded primary mortgage may be
changed by a supplemental mortgage and, under the provisions noted above, no additional mortgage
recording taxes will be due as long as the amount secured remains the same. City of New York v.
State Tax Commission, 130 A.D. 2d 890, 891. Were the indebtedness secured by a lien to be reduced
or the lien terminated for any reason, tax would be due on any increase on the new obligation. (See,
Matter of Rednow Realty Corp. v. Tully, 72 A.D. 2d 621, 622).
In City of New York v. Procaccino, 46 AD2d 594, 364 NYS2d 582 (3d Dept 1975) the Court
held that a supplemental mortgage will be exempt from any additional mortgage recording tax if it
involves no new principal obligation or mortgage debt but merely consolidates an existing secured
debt.
In Brodsky v. Murphy, 26 AD2d 225, 272 NYS2d 238 (3d Dept), aff'd 20 NY2d 282, 231
NE2d 768, 285 NYS2d 73 (1966) the Court held that the extension of maturity date and the method
of payment does not create a new mortgage (citing Suffolk County, 5 AD2d at 641, 174 NYS2d at
395) and that new and higher rates of interest did not create a new mortgage.
Section 275 of the Real Property Law generally requires that a certificate of discharge of
mortgage be recorded whenever a mortgage upon real property is due and payable and the full
amount of principal and interest due on the mortgage is paid. The certificate of discharge of
mortgage requirement contained in Section 275 of the Real Property Law was designed to prevent
taxpayers from avoiding the mortgage recording tax by reusing a "dormant" mortgage as security for
another loan or obligation. Section 275(2)(b) of the Real Property Law, however, provides that the
full amount of principal and interest due on a mortgage shall not be considered paid whenever such

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mortgage continues to secure a bona fide debt and an enforceable lien continues to exist, such as may
occur in connection with the refinancing of a construction loan with permanent financing where the
new lender acquires the loan from the existing lender and amends the loan documents to reflect
changes in terms.
Moreover, Technical Services Bureau Memorandum TSB-M-89(6.1)-R, August 3, 1989
entitled Amendments to Article 11 of the Tax Law and Sections 275 and 339-ee of the Real Property
Law by Chapter 241 of the Laws of 1989, provides, in part, as follows:
The replacement of a construction loan with permanent
financing will not be subject to section 275 because the mortgaged
property continues at all times to serve as collateral for a bona fide
debt (first to the construction lender, and then to the permanent
lender). The fact that the obligor under the mortgage may change
(e.g., a purchaser of the newly constructed building is substituted for
the builder) would not alter this conclusion.
Pursuant to the above sited laws, regulations, court decisions and the Technical Service
Bureau memorandum, subsequent to the recording of a mortgage on which all taxes, if any, have
been paid, a supplemental instrument or mortgage is recorded for purposes of modifying a prior
recorded primary mortgage, such additional instrument or mortgage will not be subject to the taxes
imposed under Section 253 of the Tax Law 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 the instant case, Petitioner intends
to refinance the construction loan with permanent financing under the terms contemplated by the
Mortgage Loan Application and Agreement, between Petitioner and the New Lenders. Under the
Mortgage Loan Application and Agreement, the New Lenders will lend a minimum of $145,000,000
and a maximum of $155,000,000. It is expected that the borrowing under the Mortgage Loan
Application and Agreement would be used to refinance the existing construction loan and to
establish an escrow account to fund tenant allowances for the Project. To accomplish the refinancing
of the construction loan, Petitioner intends to exercise its right under Section 11.1 of the Installment
Sale Agreement to terminate the Installment Sale Agreement, as a result of which the Agency will
transfer all of its right, title and interest in and to the Project to Petitioner. Concurrently with the
transfer of title to the Project to Petitioner, the Existing Lenders will assign the Mortgage and related
documentation to the New Lenders and the Agency will be released from all of its obligations under
the Mortgage. Thereafter, the New Lenders and Petitioner will amend the Mortgage and related
documentation to reflect certain changes, including the consolidation of the Building Loan Mortgage
and the Indirect Costs Mortgage, a new term and a new interest rate. At no point will any of the
indebtedness secured by the Mortgage be discharged and the maximum aggregate principal amount
secured by or which under any contingency may be secured by the Mortgage will not be increased
as a result of such amendment. Accordingly, since the Amended Mortgage presented for recording
will not create or secure a new or further indebtedness or obligation other than the principal
indebtedness or obligation secured by the Mortgage, the recording of the Amended Mortgage will

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constitute the recording of a supplemental mortgage or instrument under Section 255 of the Tax Law
and Section 645.1(a) of the Mortgage Recording Taxes Regulations and will, therefore, not be
subject to the mortgage recording taxes imposed under Article 11 of the Tax Law.

DATED: July 6, 1995

/s/
PAUL B. C0BURN
Deputy Director
Taxpayer Services Division

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