Long-term rentals have exploded in the private lending space during the last several years.
Private lenders entering the New York market who want to be competitive must understand and be able to handle CEMA, a unique regulation pertaining to long-term rental assets. There are no CEMA regulations in other states, and lenders can face unexpected roadblocks and delays due to a lack of familiarity with CEMA.
NY State Mortgage Tax
Before we dive into CEMA, let’s review the New York state mortgage tax.
New York state imposes a tax on the recording of a mortgage on real property located within the state, otherwise known as mortgage tax. In addition to the tax imposed by the state, New York City, Yonkers, and various counties impose local taxes on mortgages recorded in those jurisdictions. The mortgage recording tax is calculated as a percentage of the principal loan amount and applies to new mortgages made for acquisitions, construction loans, and refinances. The New York state mortgage tax is the highest in the nation and imposes an enormous burden on the borrower.
As a general overview, in New York City, for all properties where the mortgage amount is less than $500,000, the mortgage tax rate is 2.05%. For a one, two, or three-family home or individual residential condominium unit where the mortgage amount is $500,000 or more, the rate is 2.175%. Properties of all other types where the mortgage amount is $500,000 or more are taxed at the rate of 2.8%. The mortgage tax rate outside of New York City on all properties is 1.05%, except for Westchester County (1.3%), Rockland County (1.3%), and the City of Yonkers (1.8%).
Let’s consider an example. For a six-unit multi-family residence with a mortgage amount of $3,000,000, the following mortgage tax will be imposed:
- New York City: $84,000
- Westchester/Rockland County: $39,000
- Nassau/Suffolk/Upstate: $31,500
As a result of the tremendous tax imposed, the CEMA transaction is essential to all private lenders originating in New York.
What Is the CEMA?
In lieu of a traditional mortgage refinance, where the existing mortgage is canceled/satisfied and a new loan is originated, a New York Consolidation, Extension, and Modification Agreement (CEMA) allows a lender and a borrower to combine any existing note and mortgage with any new note and mortgage issued by the new lender into one consolidated loan obligation. In accordance with the foregoing, the existing mortgage is assigned from the prior lender (assigning lender) to the incoming lender (new lender).
Section 255 of the New York Tax Law allows a borrower to avoid paying mortgage tax on the unpaid principal balance of the existing loan and to pay tax on only the new indebtedness issued by the new lender.
As an example, where the existing mortgage has an unpaid principal balance of $3,000,000 on which mortgage tax was initially paid and the new lender is providing a cash-out refinance in the amount of $3,500,000, the borrower will pay mortgage tax on only $500,000—an $84,000 savings if the transaction is in New York City.
The documentation necessary to assign, modify, and consolidate a mortgage is formulaic and cumbersome. At the outset, the new lender’s closing attorney must review the mortgage schedule in the title commitment to determine which documents must be obtained from the assigning lender to complete the CEMA.
Initially, new lender’s counsel will communicate with the assigning lender’s counsel to draft the Assignment of Mortgage and Allonge and to obtain copies of all mortgages, notes, mortgage assignments, and allonges contained in the mortgage schedule for review (underlying collateral). Moreover, since there are often prior CEMA transactions in the mortgage schedule, the underlying collateral must be provided for each layer in the chain of mortgages.
The underlying collateral is reviewed for, among other things, accuracy as to the parties, loan amounts, and dates and to ensure there are no breaks in the chain of assignments (and allonges to the notes). Failure to obtain the complete and accurate underlying collateral comes with serious consequences that could result in the unenforceability of the mortgage being made by the new lender.
To complete the CEMA, the assigning lender must provide all original notes, allonges, mortgages, and mortgage assignments for each and every mortgage listed in the title commitment at closing. This can be a lengthy process depending upon the speed at which the assigning lender and its counsel are willing and able to cooperate. Location and retrieval of the original underlying collateral could take days or weeks, varying with each transaction.
In the commercial mortgage-backed securities market, notes are often transferred from initial lenders to secondary market buyers, as lenders bundle mortgages together and sell them as income-producing investments to institutional buyers. Since it is an industry standard practice to maintain promissory notes separately from the rest of the mortgage loan documents, when a mortgage loan is sold or its servicing is transferred to another mortgage loan servicer, the mortgage loan file and the note are both shipped to the new owner or servicer. As a result, promissory notes may be misplaced or lost.
New York case law generally requires the production of the note and mortgage to establish a prima facie case for a judgment of foreclosure and standing for the mortgagee in a foreclosure action. In the event of a missing note, New York counsel must request and review a lost note affidavit from the existing lender. Recent case law has indicated that courts will highly scrutinize the circumstances and facts surrounding the lost note and the lender’s lack of possession of same.
At a minimum, the lost note affidavit should contain the following:
- A signed and notarized statement that the physical note has been lost.
- A clear statement of the amount, interest rate, and repayment terms of the loan, the date the original note was signed, and the proper legal names of all parties involved.
- A description of the circumstances surrounding the loss, using as much detail as possible.
- Statements describing the acts taken to search for the document as well as any specifics about its unavailability.
- A representation that it has full rights and title to the note, which it cannot now produce.
Diligence Is Key
As you can see, the CEMA is a complex process. It is a time-consuming process that cannot begin once a file is clear to close. Best practices must include a realistic, deal-specific timeline to complete the CEMA process. Lenders should engage its processing/closing team with New York counsel at the earliest opportunity to move the file to closing as diligently and quickly as possible.