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BLOG / 01.21.20 /

In Leasing or Purchasing Real Estate from a Not-for-Profit, the Purchase Money Mortgage is Probably Not an Option

As a New York Times article from last October[1] described, religious institutions strapped for operating funds or wishing to utilize their real property as investment vehicles can enter into sales or long-term lease agreements with developers. However, New York State Religious Corporation Law requires religious institutions to obtain judicial and/or New York State Attorney General approval for such transactions, and the article pointed to concerns raised by city officials that such transactions are not always made in the best interest of congregants and community stakeholders.

A recent decision from the Appellate Division, Second Department noted that one concern arises when a developer wants to acquire the religious (or other not-for-profit) real estate through a purchase money mortgage.[2] A purchase money mortgage is a mortgage the seller gives to the buyer, to be repaid post-closing. The buyer takes title and/or possession of the property at closing but makes post-closing purchase payments to the seller, with the property held as collateral.

In the case at issue, the Court found that using a purchase money mortgage as a substantial component of the purchase price was not “fair and reasonable” to the Church, as required by New York State law, because that type of transaction would have rendered the Church a lender risking receiving less than the fair market value for the property. When the buyer presented revised terms including an increased purchase price, but still acquiring largely through a purchase money mortgage, the Church declared the contract null and void. The Court agreed, finding that Church was not required to continue using its “best efforts” under the contract to obtain court approval where the buyer insisted on contract terms initially unsatisfactory to the Court.

Purchases and developers looking to acquire or lease religious and not-for-profit real estate are reminded that freedom to contract in New York State is not absolute, and negotiating “in good faith” will require satisfying judicial and/or New York State Attorney General intervention.

[1] “For Churches, a Temptation to Sell”, New York Times (10/4/19)

[2] GG Acquisitions LLC. v. Mount Olive Baptist Church of Manhasset (11/8/19)