In this month’s Ask the Experts article, Attorney Michael Xylas talks with us about purchase CEMAs and “splitters” and what it means in the context of New York City’s real estate market.

A couple of months back, clients of ours agreed to purchase a condo unit in a newly developed building in Brooklyn. The listing agent called our team’s finance specialist to ask if the bank that the buyers were using to obtain their mortgage could accommodate for a “purchase CEMA.” It’s a question our team always asks the listing side when one of our buyers becomes interested in a specific property. But we were surprised when the seller made a point to ask our side if we’d oblige.

If you’re unfamiliar with the term CEMA, it stands for Consolidation, Extension, Modification, Agreement. It’s a fancy way of saying you can avoid paying mortgage tax to New York State, as long as you do a CEMA loan.

A CEMA loan is quite common when a property owner refinances their mortgage. New York City residents pay a mortgage tax equal to 1.925% of their mortgage when they buy a property (1.8% if the loan is less than $500,000), so if there was a mechanism for avoiding the tax when you re-mortgage, it makes sense to choose that option. But, it’s important to note that CEMA loans aren’t restricted to refinances.

In a re-sale transaction, with the seller’s cooperation, the buyer can avoid paying mortgage tax against the seller’s current principal mortgage balance by way of a “purchase CEMA.” When buying a unit in a newly constructed building, a purchase CEMA can also be completed even though there isn’t a vacating seller who has a current mortgage against the unit that’s being transacted. So instead, an additional step is added to the equation, something called a “splitter agreement,” where a portion of the underlying commercial mortgage the developer may have taken out to construct the building is split-off from the main loan. The buyer avoids paying mortgage tax against the amount of the split mortgage.

So, to circle back to the beginning of this conversation, why were we surprised that the Brooklyn sponsor’s agent reached out to ask if our buyers would do a purchase CEMA. We were already aware that there is a benefit to the seller. They can avoid paying a state transfer tax through what is called a continuing lien deduction, but that transfer tax isn’t nearly as expensive as mortgage tax. And, a deal had already been agreed upon with significant concessions already in place. But certainly, we weren’t going to argue over our clients getting an additional benefit – it was found money, an additional $14,000 savings in this instance.

Last week, we reached out to Michael Xylas, a partner at the law firm Abrams Garfinkel Margolis Bergson LLP. He estimates that the firm will represent about a hundred different mortgage lenders on more than 8,000 transactions in 2019. Of those, he thought 2,000- 2,500 would be CEMA loans, pointing out that some were co-op closings where there is no mortgage tax and therefore no need for a CEMA.

Because of the massive supply of newly constructed condominiums in New York City creating such a highly competitive buyer’s market, we asked Xylas if there has been an uptick in splitter agreements. Have developers been pushed to offer additional incentives beyond the price cuts and concessions they’ve been offering?

“I’m hearing that they are,” Xylas said, though he didn’t offer up any guesses as to the percentage of developers that proactively offer splitter agreements. He did tell us that in the past it had been the developer who benefited from a splitter. “It was a way for them to recoup the mortgage tax they already paid,” he said, noting that developers pay an even higher tax of 2.80% against underlying commercial mortgages.  “It’s only turned now with the market changing the way it has, that developers are offering to do the splitter and give the borrower the benefit”

During the course of our conversation with Xylas, he mentioned another shift away from the past, a change he’s noticed more very recently. “Historically, (the sponsor) would split off the exact amount that the person was taking out (in a mortgage) and there would be no new money,” he said, pointing out that this would shelter the buyer 100% from paying any mortgage tax. But that’s not necessarily the case anymore. “Developers seemingly have certain amounts they’re willing to split off,” Xylas said. “I guess because they wanted to have enough corpus of money to split off for all the units. Maybe they felt like they had a maximum that they would allocate toward each unit to be split off.”

That made a lot of sense to us. A sponsor might take out a mortgage for $50 Million to develop a condominium with an inventory of units worth $100 Million or more. If they offer up a splitter for the full mortgage amount on every sale, it stands to reason that eventually, there would be nothing left to split off. And in a final push to sell the remaining units, there would be fewer incentives in their arsenal to close out the remaining sales.

Why This Matters

There are a million ways to read the market. Some clues are better than others, and some are just more obvious. It’s a lot easier to track median sales price than it is to notice that more sponsors are offering splitter agreements for a buyer’s benefit. Part of our job is to pay attention to the little things, so we can extract the most value for our clients.

Raw Data

Total amount of mortgage tax collected for fiscal 2019 in New York City was $1,468,029,950.

By County:
New York = $649,162,288
Kings = $405,017,670
Queens = $260,325,593
Bronx = $82,297,029
Richmond = $71,227,371