New York State imposes a tax on the recording of mortgages. The tax is calculated based on the amount of a loan. Loans that are $500,000 or less will have a tax rate of 2.05%. The tax rate increases to 2.175% for loans that exceed $500,000.

Borrowers are always responsible for paying the mortgage recording tax. The mortgage recording tax is typically one of the most expensive items, if not the most expensive item on a borrower’s title bill. At closing, borrowers are required to provide their title company with a payment for the mortgage recording tax. The title company will then submit the mortgage recording tax payment with the mortgage for recording with the proper county clerk.

Recently, Adam Leitman Bailey, P.C.’s transactional department represented a prominent lender in a deal involving the purchase of a new development condominium unit. In this purchase, the borrower was purchasing the unit directly from the building’s developer. The borrower was able to save thousands of dollars through what is known as a “splitter.”

A Severance and Splitter Agreement was negotiated between the developer of the new construction condominium and their lender. Such agreements are usually negotiated where a developer has already paid a mortgage recording tax on their construction loan and their lender permits a portion of the developer’s loan to be assigned to the borrower’s lender. Thus, it is as if the lender is “splitting off” a portion of the developer’s loan and assigning it to the borrower’s lender.

As a result, the purchaser was only responsible for paying the mortgage recording tax on the difference between their loan amount and the unpaid principal balance of mortgage that was assigned by the developer. The developer’s assigned mortgage was then consolidated with the borrower’s mortgage. As the new lender’s attorney, Adam Leitman Bailey, P.C. communicated with the lender, borrower’s attorney, and the assigning lender’s attorney and prepared the CEMA documents. This resulted in a single lien against the new condominium unit listing the Borrower as the only mortgagee.

Here is an example of the foregoing: If a borrower has a loan of $1,000,000 and the developer has a unpaid mortgage balance of $700,000, then the borrower would only pay the mortgage tax on $250,000. Thus, the total mortgage recording tax would be $5,125. Whereas if a splitter was not used and CEMA was not opted for, the mortgage recording tax would have been $21,750. In such a scenario, the borrower would save $16,625 significantly reducing the borrower’s closing costs by thousands of dollars.

In conclusion, a borrower who is purchasing new construction condominium units should consider asking a Seller-Developer about opting for a Severance and Splitter Agreement with their lender and opting for a CEMA as this will result in thousands of dollars of savings for the borrower.