LEGAL LINE QUESTION: PURCHASE CEMAs -
|A: A mortgage tax is imposed on a borrower and lender when a mortgage|
is made and recorded in New York State. Under certain circumstances,
the mortgage tax can be reduced or avoided. A "CEMA" (which is
an acronym for Consolidation, Extension and Modification Agreement)
is the process by which the reduction of the mortgage tax is accomplished.
A Purchase CEMA permits a purchaser to avoid or reduce mortgage tax
in a purchase transaction when the seller’s lender assigns the seller’s
existing mortgage to the purchaser’s lender. For example, instead of paying
the mortgage tax on the purchaser’s full loan amount, with a Purchase
CEMA the purchaser only pays the mortgage tax on the difference between
the purchaser’s new mortgage amount and the unpaid principal balance
of the seller’s existing mortgage. For a Purchase CEMA to be successful:
(i) the seller must have an existing mortgage and the mortgage tax must
have been paid on such mortgage;
(ii) the seller’s lender must be willing to assign the seller’s mortgage to the
purchaser’s new lender and (iii) the purchaser’s new lender must be willing
to accept the assignment of the seller’s mortgage and to permit the
purchaser to close their new loan as a CEMA.
Mortgage tax differs from county to county in New York State.
For instance, in the 5 boroughs of New York City (New York, Kings, Queens,
Bronx and Richmond counties) the mortgage tax rate is 1.925% for
a loan amount of $500,000 or greater and 1.8% for a loan amount of less
than $500,000. Assuming a purchase price of $1,000,000 on a New York
City condominium where the purchaser is obtaining a mortgage
of $750,000.00, the mortgage tax would be $14,437.50 ($750,000 x 1.925%).
If, however, the purchaser participates in a Purchase CEMA and
the balance on the seller’s mortgage is $500,000, then the mortgage tax
will only be calculated on $250,000 ($750,000 - $500,000).
Under this scenario, the purchaser will only pay $4,500 in mortgage tax
($250,000 x 1.8%). By using the Purchase CEMA process,
the purchaser’s mortgage tax savings will be $9,937.50 ($14,437.50 - $4,500).
When doing a Purchase CEMA, there is also savings to the seller.
New York State imposes a transfer tax on all sales transactions,
which transfer tax is usually paid by the seller. New York State transfer tax
is equal to .4% of the purchase price (alternatively, $4.00 for every $1,000.00
of sales price). However, in a Purchase CEMA transaction, New York State
permits a "continuing lien deduction" which allows the seller to
pay transfer tax on the purchase price less the amount of the unpaid
principal balance of the seller’s existing mortgage. In the example above,
the seller would save $2,000 if the Purchase CEMA process is used
($4,000 ($1,000,000 x .004) - $2,000 ($1,000,000 - $500,000 =
Additionally, a lender is able to reduce its mortgage tax obligations in
a Purchase CEMA transaction. A lender’s portion of the mortgage tax in
New York State is .25% of the mortgage amount. In the example above,
the lender would save $1,250 if the Purchase CEMA process is used
($1,875 ($750,000 x .0025) - $625 ($750,000 - $500,000 =
$250,000 x .0025)).
Important Tips: A Purchase CEMA may only be accomplished if
the property is real property (i.e. a condominium or a house).
It is not applicable to cooperative units (as the stock and lease
that evidence the ownership of a co-op is personal property,
not real property).
When negotiating an offer for a purchaser who intends to use
a Purchase CEMA, one should be cognizant of the fact that,
in general, a Purchase CEMA may add several weeks to
the closing process and the closing date in the contract of sale
should be reflective of such extended date. It is also important
to keep in mind that there are additional lender and title fees associated
with closing as a Purchase CEMA and the potential savings should
be calculated carefully by the attorneys for the seller and the purchaser.
Furthermore, the Purchase CEMA is only possible because the seller
has previously paid mortgage tax. The seller, therefore, may want
to recoup a portion of the mortgage tax it previously paid.
Accordingly, it is common for the seller and purchaser to negotiate
how the savings on the mortgage tax will be shared by the parties
if they utilize the Purchase CEMA process.
Finally, the Purchase CEMA process can be complicated.
Purchasers and sellers should speak to experienced counsel
when considering this tax saving strategy.
Neil B. Garfinkel,
REBNY Broker Counsel
Partner-in-charge of real estate and banking practices at
Abrams Garfinkel Margolis Bergson, LLP