LEGAL LINE QUESTION: PURCHASE CEMAs -

Legal Line Question: Purchase CEMAs

Q: I am representing a buyer in an upcoming condominium purchase. I understand that a buyer and seller can save money by using a process called a "Purchase CEMA" and that many lenders are permitting this. What is a Purchase CEMA and how can it save the purchaser and seller money?

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 = $500,000 x.004)). 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