We're structuring a mortgage that will advance and re-advance funds to reimburse or fund real property improvements, but we're not signing a formal Lien Law building loan agreement. Does skipping that paperwork let the mortgage qualify as a tax-advantaged 'credit line mortgage' under Tax Law § 253-b, so mortgage recording tax is paid once on the maximum principal instead of on every advance?

Plain-English summary

Michael Berey, senior underwriting counsel at First American Title Insurance Company of New York, regularly fielded questions about when a mortgage that advances and re-advances funds for property improvements qualifies as a tax-favored "credit line mortgage" under Tax Law § 253-b. A credit line mortgage is taxed only once, on its maximum principal amount, no matter how many times funds are drawn down and re-advanced — a real savings compared to an ordinary construction mortgage, which can trigger additional recording tax each time the secured debt increases. Berey asked whether that favorable treatment was available for mortgages funding improvements where no formal Lien Law "building loan agreement" was ever signed — reasoning that skipping the paperwork might avoid the building-loan-contract exclusion from credit-line-mortgage status.

The Department said no, in both of the scenarios Berey described (reimbursing the borrower for improvement costs already incurred, or directly funding improvements as they're made). Lien Law § 2(13) defines "building loan contract" by substance, not by label: any contract where a lender agrees to advance funds — secured by a mortgage — in exchange for the owner's "express promise" to improve the property. A mortgage that limits its advances and re-advances specifically to reimbursing or funding property improvements necessarily embeds that express promise in its own terms, whether or not the parties ever executed a separate document formally called a "building loan agreement." Since Tax Law § 253-b(2) excludes any mortgage made pursuant to a building loan contract from qualifying as a credit line mortgage, these mortgages fail that test regardless of their principal amount, and the third question (about an explicit improvement promise) became moot — the mortgages already failed for the same underlying reason before that language was even added.

What this means for you

Construction lenders and borrowers

You cannot manufacture credit-line-mortgage tax treatment for a construction-improvement loan simply by avoiding a formal Lien Law building loan agreement. If the mortgage's own terms tie advances to reimbursing or funding real property improvements, the Department will treat it as a building loan contract by substance and deny credit-line status — meaning the mortgage recording tax applies in the ordinary way rather than the one-time-tax-on-maximum-principal credit-line rule.

Title insurance underwriters and real estate attorneys

When evaluating whether a proposed mortgage can be structured as a credit line mortgage, look past whether a formal building loan agreement was executed and ask whether the mortgage or loan documents functionally promise, or limit advances to funding, an improvement to real property. That functional test controls under Lien Law § 2(13), independent of Lien Law formalities like filing a building loan contract.

Accountants and tax professionals

This is a useful companion to any credit-line-mortgage MRT planning: the Tax Law § 253-b(1-a) $3 million threshold for non-residential property, and the § 253-b(1) rule for 1-6 family owner-occupied residences, only matter once a mortgage has cleared the threshold question of not being a building loan contract in the first place.

Common questions

Q: Does executing (or not executing) a formal building loan agreement decide the outcome?
A: No. The Department looks at whether the mortgage's own terms functionally promise or fund an improvement to real property — that's what makes it a "building loan contract" under Lien Law § 2(13), regardless of paperwork labels.

Q: Does the principal amount (above or below $3 million) matter here?
A: Not once a mortgage is found to be a building loan contract — it's excluded from credit-line-mortgage status entirely, so the § 253-b(1-a) $3 million threshold for non-residential credit line mortgages never comes into play.

Q: Can other lenders or title companies rely on this specific opinion?
A: No. It binds the Department only as to the petitioner and the fact patterns described, but the underlying rule — substance over form for building loan contracts — is a general statutory interpretation likely to apply broadly to similarly structured mortgages.

Citations and references

Statutes:

• Tax Law §§ 253(1), (1-a), (2) (mortgage recording tax imposition, measured by principal debt secured)
• Tax Law § 253-b(1) (credit line mortgage on 1-6 family owner-occupied residence -- tax on maximum principal only)
• Tax Law § 253-b(1-a) (credit line mortgage under $3 million on other property -- same tax treatment)
• Tax Law § 253-b(2) (definition of "credit line mortgage"; excludes mortgages made pursuant to a Lien Law building loan contract)
• Lien Law § 2(13) (definition of "building loan contract" -- lender advances in consideration of owner's express promise to improve real property)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/mortgage_rec_ao_1999.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/mortgage/a99_2r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-99(2)R
Mortgage Recording Tax
April 7, 1999

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M981215A

On December 15, 1998, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Michael J. Berey, Senior Vice-President and Senior Underwriting Counsel,
First American Title Insurance Company of New York, 228 East 45th Street, New York, NY 10017.
Additional information related to the Petition was received on February 12, 1999.
The issues raised by Petitioner, Michael J. Berey, are:
(1) Whether a mortgage, in the principal amount of less than $3 million,
executed to secure the repayment of advances and re-advances made to reimburse the
borrower for expenses incurred in making improvements upon real property and
without the execution of a building loan agreement would qualify as a credit line
mortgage;
(2) Whether a mortgage, in the principal amount of less than $3 million,
executed to secure the repayment of advances and re-advances made to fund – but not
reimburse the borrower for – the making of improvements upon real property and
without the execution of a building loan agreement would qualify as a credit line
mortgage;
(3) If the answer in issue (2) is that such a mortgage would qualify as a credit
line mortgage, whether such mortgage would still qualify if the mortgage or other
loan documents contains an express promise to make an improvement upon real
property.
Petitioner presents the following facts. Counsel to First American are often asked for
guidance on the application of the mortgage recording tax imposed pursuant to Article 11 of the Tax
Law. Inquiries have been made as to the application of Section 253-b of Article 11, concerning
credit line mortgages, to mortgages securing advances and re-advances of funds made in connection
with the making of improvements on one or more parcels of real property where no "building loan
agreement" is executed under the Lien Law.
Petitioner states that a mortgage loan will be executed and that the mortgage or the
documents related to such mortgage will recite that the funds are to be advanced and re-advanced
either:
(i) to reimburse the borrower for expenses incurred in making improvements
upon real property; or

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Mortgage Recording Tax
April 7, 1999

(ii) to fund the making of improvements upon real property.
Petitioner states that, in either case, no formal building loan agreement will be executed.
Applicable Law
Subdivisions (1), (1-a) and (2) of section 253 of the Tax Law impose the mortgage recording
tax on the recording of a mortgage of real property in New York State. Such tax is measured by the
principal debt or obligation which is, or which under any contingency may be, secured at the date
of the execution of the mortgage or at any time thereafter.
Subdivision (1) of section 253-b of the Tax Law provides, in part:
In the case of a mortgage which is a credit line mortgage . . . of real property
principally improved or to be improved by a one to six family owner-occupied
residence or dwelling, the principal debt or obligation which is or under any
contingency may be secured at the date of execution of such mortgage or at any time
thereafter within the meaning of this article shall mean the maximum principal
amount specified in such mortgage. If the tax imposed by and pursuant to the
authority of this article is paid on such maximum principal amount, no further tax
shall be payable on advances or readvances by the lender pursuant to the recorded
primary mortgage, provided such advances or readvances are made to the original
obligor or obligors named in such recorded primary mortgage. . . .
Subdivision (1-a) of such section 253-b provides:
In the case of a mortgage which is a credit line mortgage, as defined in
subdivision two of this section, of property other than real property principally
improved or to be improved by a one to six family owner-occupied residence or
dwelling, and where such mortgage is of an amount less than three million dollars,
the tax imposed by and pursuant to the authority of this article shall be imposed and
paid pursuant to the provisions of subdivision one of this section.
Subdivision (2) of such section 253-b provides, in part:
For the purposes of this section, a 'credit line mortgage' shall mean any
mortgage or deed of trust, other than a mortgage or deed of trust made pursuant to a
building loan contract as defined in subdivision thirteen of section two of the lien
law, which states that it secures indebtedness under a note, credit agreement or other
financing agreement that reflects the fact that the parties reasonably contemplate
entering into a series of advances, or advances, payments and readvances, and that

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limits the aggregate amount at any time outstanding to a maximum amount specified
in such mortgage or deed of trust. . . .
Subdivision (13) of section 2 of the Lien Law provides, in part:
The term 'building loan contract' . . . means a contract whereby a party
thereto, in this chapter termed 'lender,' in consideration of the express promise of an
owner to make an improvement upon real property, agrees to make advances to or
for the account of such owner to be secured by a mortgage on such real property. . . .
Conclusions
With regard to issue (1) raised by Petitioner, a mortgage executed to secure the repayment
of advances and re-advances made to reimburse the borrower for expenses incurred in making
improvements upon real property would not qualify as a credit line mortgage because such mortgage
would be made pursuant to a "building loan contract." Also, because the mortgage in question is not
a credit line mortgage, whether the principal amount of the mortgage is greater or less than $3
million is not relevant.
In the situation described by Petitioner, the mortgage, or the documents related to such
mortgage, will recite that the funds are to be advanced and re-advanced to reimburse the borrower
for expenses incurred in making improvements upon real property. The limiting conditions of the
mortgage, or the documents related to such mortgage, regarding the advance and re-advance of
funds constitute an "express promise" of the borrower to make improvements to real property; i.e.,
the mortgage funds will not be advanced, nor may the funds be used, for any purpose other than to
reimburse the borrower for making such improvements. Therefore, the mortgage is made pursuant
to a "building loan contract," as defined by section 2(13) of the Lien Law, and does not qualify as
a credit line mortgage under section 253-b of the Tax Law.
With regard to issue (2) raised by Petitioner, a mortgage executed to secure the repayment
of advances and re-advances made to fund the making of improvements upon real property would
not qualify as a credit line mortgage because such mortgage would be made pursuant to a "building
loan contract." Also, because the mortgage in question is not a credit line mortgage, whether the
principal amount of the mortgage is greater or less than $3 million is not relevant.
Similar to the conclusions reached regarding issue (1), the limiting conditions of the
mortgage, or the documents related to such mortgage, regarding the advance and re-advance of
funds constitute an "express promise" of the borrower to make improvements to real property.
Because the mortgage funds will not be advanced, nor may the funds be used, for any purpose other
than to fund the making of improvements upon real property, the mortgage is made pursuant to a
building loan contract and does not qualify as a credit line mortgage.

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April 7, 1999

Issue (3) raised by Petitioner is moot, since the mortgage described in issue (2) does not
qualify as a credit line mortgage. It should be noted that section 253-b(2) of the Tax Law looks only
to the Lien Law definition of "building loan contract." The mortgage recording tax does not look
to any further provisions of the Lien Law, or to any actions taken thereunder (e.g., the execution of
a formal building loan agreement), to determine if a given mortgage qualifies as a credit line
mortgage. If a mortgage is made pursuant to a building loan contract, it cannot qualify as a credit
line mortgage; if a mortgage is not made pursuant to a building loan contract, it may qualify as a
credit line mortgage as long as such mortgage meets the other requirements of section 253-b of the
Tax Law.

DATED: April 7, 1999

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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