by Peter Larsen
Special to Realty/Builder Connection
As interest rates continue to fall and record numbers of homebuyers and commercial borrowers refinance their debt, the explosion of refinancings may also create an unintended windfall to Florida in the form of documentary stamp and nonrecurring intangible tax revenues. However, with a little foresight, it is possible for “refis” to be accomplished without payment of documentary stamp and nonrecurring intangible taxes on the amount being refinanced.
The Florida statutes currently impose a documentary stamp tax in the amount of 35 cents per $100 on promissory notes, non-negotiable notes, written obligations to pay money and assignments of salaries, wages or other compensation which are made, delivered, sold, transferred or assigned in Florida.
A mortgage, trust deed, security agreement (not including a simple UCC financing statement filing) or other evidence of indebtedness filed or recorded in Florida which secures a written obligation to pay money is also taxable. In order to avoid double taxation where there is both a written obligation to pay money and a mortgage in the same transaction, lenders typically place a notation on the written obligation to pay money that the proper stamps have been affixed to the mortgage, trust deed, security agreement or other evidence of indebtedness.
Effective May 1, 2002, the maximum amount of tax payable on a note or other obligation not secured by a mortgage, deed of trust or other lien on Florida real property is $2,450. In effect, the cap applies to any obligation in excess of $700,000 (in enacting this cap, the Florida legislature assumed that borrowers and lenders would prefer to pay $2,450 than to the close the transaction outside of Florida.)
The documentary stamp tax cap does not apply to a mortgage, security agreement, or other lien filed or recorded in Florida A mortgage, security agreement, or other lien filed or recorded in Florida is subject to documentary stamp tax on the full amount of the obligation secured.
Nonrecurring intangibles tax is also currently imposed at the rate of 2 mills of indebtedness on the just value of a note or other obligation to pay money that is secured by a mortgage, deed of trust or other lien on Florida real property.
When performing refinancings with new lenders, most lenders prefer to use their own standard form documents and, in order to clean up the chain of title to the mortgaged property, record a satisfaction of mortgage with the county clerk’s office. Most lenders then rely on the renewal rules under Section 201.09, Florida Statutes, in order to avoid additional documentary stamp and nonrecurring intangibles taxes on the mortgage. However, lenders may be surprised to learn that this technique may result in the imposition of documentary stamp and nonrecurring intangibles taxes.
Pursuant to Section 201.09, Florida Statutes, a renewal note is exempt from documentary stamp taxes (currently 35 cents per $100 of indebtedness) if the following statutory requirements are met: (1) the original note is attached to and kept with the renewal note, (2) the renewal note is executed by the original obligor, (3) the renewal note renews and extends only an amount equal to or less than the outstanding principal balance of the original note as of the date of execution of the renewal note and (4) the renewal note bears a notation similar to the following: “This note is a renewal of a note on which documentary stamp taxes have been paid.” In addition, the appropriate amount of documentary stamp taxes must actually have been paid on the original note or mortgage (as applicable).
For non-recurring intangibles tax purposes, if the renewal note is for an amount equal to or less than the outstanding principal balance of the original note, plus accrued and unpaid interest, no additional nonrecurring intangibles tax is due, regardless of whether the obligors on the renewal note are identical to the obligors on the original note. If the renewal note secured by Florida real property is for an amount in excess of the outstanding principal balance of the original note, and the new obligor has not assumed the original note prior to execution of the renewal note, then nonrecurring intangibles taxes are due on the entire amount secured by the Florida mortgage. If the obligors on the renewal note are the same as those on the original note, nonrecurring intangibles taxes are due only on the increased amount of the renewal note above the original face amount (in the case of revolving loans) or the outstanding balance (in the case of term loans). Please note that, for intangible tax purposes, “original obligor” means the current obligor, who may be an assignee of the initial obligor (in contrast with the documentary stamp tax rules which require that the obligor continue to be the initial obligator).
In order for the note and mortgage to be exempt as a renewal, the renewal must generally be some form of modification of an original documents that changes the terms of the indebtedness evidenced by the original document by adding one or more obligors, increasing the principal balance, or changing the interest rate, maturity date or payment terms.
There has been much confusion and debate as to whether a “refinancing” qualifies as a renewal that is exempt from documentary stamp and nonrecurring intangibles tax. Like many other areas of documentary stamp tax, the form of the transaction governs the tax consequences because the documentary stamp tax is a document tax. Thus, the structuring of the transaction will result in certain lenders structuring their transactions (many times inadvertently) in a taxable manner while other lenders’ transactions will be exempt.
For documentary tamp and non-recurring intangibles tax purposes, if a lender uses new documents to memorialize the terms of the new loan and records a mortgage satisfaction with the county clerk, the Department of Revenue takes the position that the refinancing is a new loan that is fully subject to documentary stamp and nonrecurring intangibles tax because the lender and the borrower are entering into a new loan. In essence, the Department of Revenue takes the position that there is nothing to “renew” because the old loan was satisfied and extinguished prior to the new extension of credit. In addition, the new loan is not subject to the documentary stamp tax cap because the new loan is secured by a mortgage on Florida real property.
On the other hand, if the old lender files a “release of lien” with the county clerk that releases the lien of the old mortgage (rather than a satisfaction which declares the loan to be paid in full), the Department of Revenue takes the position that the old loan was not extinguished or satisfied and that the loan is eligible for a “renewal” under Section 201.09, Florida Statutes, so long as the four renewal requirements have been met. In order to confirm that a refinancing is exempt under Section 201.09 and under the nonrecurring intangible tax rules, the old lender (if a new lender is involved) or the existing lender (for an in house refinancing) should refrain from marking the old note “Paid in Full” and should instead use the notation “Paid by Renewal.” In such a case, the old lender may want to release its note to the borrower as paid by renewal instead of assigning the note to the new lender (as an alternative to an assignment of note and mortgage followed by execution of a renewal note and amended & restated mortgage, which gets quite cumbersome).