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Borrowers considering obtaining commercial loans with swap agreements may want to review the NYS Department of Taxation and Finance’s recent tax bulletin (TB-MR-30) issued on June 5, 2012. The bulletin sets forth the conditions under which breakage costs associated with interest rate swap agreements will or will not result in the imposition of mortgage recording tax.
Breakage costs are the costs imposed under the terms of an interest rate swap agreement that allows the borrower to terminate the swap agreement prior to its maturity.
Terminating an interest swap agreement usually becomes a consideration when the borrower needs to refinance in order to obtain more money or to take advantage of falling interest rates. Since breakage costs can be quite substantial, this issue should be reviewed carefully to ensure that mortgage recording tax does not become an unforeseen cost to the borrower.
Mortgage recording tax is calculated only on the “principal debt or obligation” secured by the mortgage and not on the either the interest or the “incidental amounts” secured by the mortgage. The bulletin indicates that breakage costs are deemed “incidental amounts” for purposes of calculating mortgage recording tax if all of the following conditions apply:
1. The mortgage classifies breakage costs as “additional interest” that is part of the secured obligation.
2. The swap agreement arises out of the same loan secured by the mortgage, and not for another loan.
3. The swap agreement and the mortgage both reflect the same principal amount.
Any attempt to secure the payment of the breakage costs with an additional mortgage will allow the costs to be considered principal debt and therefore subject to further mortgage recording tax. Any attempt to capitalize incidental amounts as part of the principal amount will likewise allow breakage costs to be subject to mortgage recording tax.
We’ve all heard the usual gripes of serving on a condominium or coop board…being woken up at all manner of hour to assist residents who have locked themselves out of their apartment, getting caught in between unit owners with seemingly trivial disputes about living habits, having to work with other board members with conflicting personality types. These types of experiences have often dissuaded a fraction of the condominium’s or coop’s residents from volunteering their time to serve on their boards. Invariably, some residents find within themselves the courage and will to endure these trials in the hopes of improving the communal living environment and the fiscal health of their building. A recent ruling in the Appellate Division, First Department now makes more unsavory the prospect of serving on condo and coop boards by increasing the likelihood that a board member will be held personally liable for actions of the board in certain circumstances.
New York State law insulates the actions of the condominium’s board of manager or cooperative corporation’s board of directors from liability under the “business judgment rule.” Under this standard, the court may not review actions of board of directors when those actions were made in good faith and were an exercise of honest judgment in lawful and legitimate furtherance of corporate purposes. The court may only inquire into corporate acts that amount to arbitrary or malicious decision making, favoritism and discrimination. Furthermore, a case in 2006 (Pelton v. 77 Park Ave. Condominium), seemed to suggest that individuals serving on the board would be protected from being held individually liable if their tortious actions were committed in furtherance of the board’s interests.
On July 3, 2012, the Appellate Division, First Department, clarified the extent of personal board member liability in Fletcher v. Dakota, 2012 NY Slip Op 05338. In Fletcher, the plaintiff brought an action against two individuals serving on the board of directors in the cooperative in which he lived, claiming that they had unlawfully denied him permission to purchase a coop unit in a building in which he was already a shareholder. Fletcher claimed that the board’s denial was retaliation for his earlier advocacy for the rights of other racial minority shareholders at the coop, and not, as claimed by the board, for his financial inability to manage other coop apartment. The Appellate Division made clear that Pelton did not protect the defendant directors because the claim was one of tortious conduct, not protected by the business judgment rule. That the defendants’ acts were taken in furtherance of their duties as board members, and not outside their roles as board members, was deemed inconsequential by the court in allowing the case to proceed. The court could find no legal basis supporting the proposition that “director liability arises only where the director commits a tort independent of the tort committed by the corporation itself.” The court further stated that defendants’ reliance on Pelton was misplaced because Pelton involved a claim of breach of contract, and not a claim of tort as was asserted by Fletcher.
Thus, Fletcher stands for the proposition that a corporate officer or director can be held personally liable for tortious acts of their own and those committed on behalf of the condo or coop . . . just another reason to give one pause before deciding to join their condo or coop board.
New York State has backed off its earlier policy requiring all developers to digitize their offering plans for condominiums and co-ops. The mandate required the electronic filings to be certified by the Department of Law and submitted either on CD-ROM, DVD or USB flash drive.
Under the original policy, which was approved November 1, 2011, developers were expected to comply with the requirement earlier this year. The goal according to the Attorney General’s office is to streamline and modernize the AG’s real estate functions and to increase efficiencies in transactions between purchasers and developers. It is part of the AG’s initiative to digitize the entire offering plan library and to enable offering plans to be submitted in electronic format. The AG’s database became accessible to online customers on January, 2011.
However, the original mandate met with resistance from some developers who argued that the requirement would be too costly and complicated for them to comply with, given how large these filings are. As a result, the policy was revised and developers may currently submit their offering plans either in digital format or paper copy. Once the AG’s system for accepting digitized offering plans is functioning, the original mandate is expected to take effect. The revised policy, entitled “Distribution of Digital Copies of Offering Plans and Amendments” is contained in the AG’s “Cooperative Policy Statement #10” and is effective May 15, 2012.
If you have any questions or would like further information regarding any of the articles in this newsletter, please contact Keith Eng, Esq. at (212) 651-1200 or keng@prestitle.com.
Also, if there are any topics that you would like us to include in future newsletters, please feel free to e-mail us with suggestions at info@prestitle.com.
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