New York Lawmakers Re-introduce Legislation to Impose Recording Tax on Mezzanine Loans and Preferred Equity Investments | White and Williams LLP

New York state lawmakers have reintroduced proposals to impose a tax on the creation of mezzanine debt and preferred equity. The New York Senate and Assembly have introduced similar bills that would require both mezzanine lenders and preferred equity investors to file a UCC-1 financing statement and pay a mortgage registration tax in order to perfect an interest. security related to mezzanine and preferred loans. capital investments. The bills were introduced on January 4, 2023 by the New York State Senate as Bill S-318, which parallels the earlier bill S-7231A, and its counterpart by the New York State Assembly as Bill A407, which mirrors the bill of formerly A9041. (Please see our previous real estate alert commenting on previous iterations of this bill here.)

The proposed legislation would impose a New York State mortgage recording tax (and allow authorized counties and cities to impose a mortgage recording tax) on both mezzanine loans and preferred equity investments, by effectively handle mezzanine loans and preferred capital investments similar to mortgage loans in real estate. The proposals would (1) amend the Uniform Commercial Code (UCC) as enacted in New York to require the filing of a UCC financing statement evidencing any “mezzanine debt” or “preferred equity investment” to be filed in county level in order to perfect a security interest with respect to the same, and (2) levy a tax on the applicable New York state and county (or authorized city, as applicable) recording mortgage tax rate for such debt and/or investment at the time the financing statement is filed. The proposed legislation would not extend the registration requirements or tax filing requirements to debt on cooperative or condominium shares.

If enacted, the legislation would amend the New York Real Property Law by, among other things, adding a new section 291-k, defining “mezzanine debt” and “preferred equity investments” as follows:

“…indebtedness carried by a borrower that may be subordinated to the principal lien [sic: of a mortgage] and is higher than an entity’s ordinary shares [sic: or person having an interest in such borrower] or equity of the borrower and reported as assets for purposes of financing this principal lien. This will include non-traditional financing techniques such as a direct or indirect investment by a financing source in an entity that owns equity. [sic: equity] interest on the underlying mortgage [sic: mortgage borrower] when the financing source has special rights or preferred rights such as: (i) the right to receive a special or preferred rate of return on its capital investment; and (ii) the right to an accelerated repayment of the investors’ capital contribution.”

Some obvious clarifications and corrections are assumed and bracketed above. But without careful drafting and additional precision, such legislative drafting that equates equity with debt, and investors with borrowers, could significantly undermine the stability and integrity of the capital pool available for commercial real estate transactions in New York State. . Critics of the proposed legislation have also been quick to point out that it provides no guidance regarding mezzanine debt financings and preferred equity investments that do not occur concurrently with mortgage financing and registration. The proposed legislation requires financing statements and the payment of these taxes only when the initiation of a bridging financing and/or preferred equity investment occurs concurrently with the registration of a mortgage securing a “tied” mortgage loan.

In addition, the proposed legislation subjects the widely accepted practice of perfection for control under UCC Article 8 to the filing standards of Article 9 as the necessary means of perfecting a security interest of a party covering the subdebt (and in some cases , preferred capital ) in New York. Security interests covering the mezzanine debt (and in some cases, preferred equity) are usually perfected by delivering the mortgagor’s certificated stock or limited liability company interests in the subject entity under the control of the mortgagor. Such standard practice usually includes such an “election” subject in Article 8 under the organizational documents of such entity.

As currently proposed, the consequence or penalty for failure to (i) file a financing statement and (ii) pay the registration fee would be that the holder of the mezzanine loan or preferred equity investment would be barred from enforcing the funds. legal according to Article 9 of the CCUK. If there were ever an expectation that the UCC would promote and encourage the adoption of principles and uniform application, the proposed legislation would make New York an outlier by providing no guidance regarding the application of such principles with respect to UCC Article 8, particularly with respect to multi-jurisdictional and/or multi-asset secured transactions.

If ratified, the proposed legislation could have a significant impact on real estate financing and the structuring of real estate transactions in New York. The bridging loan and preferred equity investments would be treated more like mortgage loans, increasing the cost of financing and investment. Currently, the mortgage registration tax in New York ranges from 1.0% to 2.8% depending on the county, the use of the property and the amount of the loan.

We expect that many industry stakeholders will follow this latest effort to tax mezzanine debt and preferred equity transactions in New York with great interest. We will continue to monitor the progress of this proposed legislation and any changes to it and provide further updates.

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