Hunton Andrews Kurth Finance and Preferred Equity Practice Groups have been tracking a bill—New York State Assembly Bill No. 9041A—that would require (i) mezzanine loans and preferred equity investments to be recorded, and (ii) a mortgage recording tax to be paid on such loans and investments. As many of you know, we structure mezzanine loans and preferred equity investments in a manner that is more cost-effective than mortgage loans. The effect of this pending Bill, however, would be that mezzanine loan and preferred equity investments involving real estate transactions in New York would be treated more like mortgage loans and therefore the overall cost of such financings and investments would become more burdensome for borrowers and sponsors.

Under the proposed Bill, (1) a financing statement evidencing any mezzanine loan or preferred equity investment related to real property would need to be filed concurrently with any related mortgage instrument, and (2) a recording tax, at (what we understand to be) the same rate as the mortgage recording tax rate, would be imposed on such investments at the time that the financing statement is filed. Failure to file the financing statement and pay the recording tax would result in an unperfected security interest. In other words, the makers of mezzanine loans may be prevented from enforcing remedies under Article 9 of the UCC. The financing transaction would also be subject to increased visibility by virtue of the financing statement being recorded against the real property. This would mean that the names of parties providing mezzanine loan and preferred equity investments would appear in a search of the public records of the property.

Revenue from the recording tax currently is earmarked to fund public housing in New York State. If enacted, the Bill is likely to have a significant impact on real estate financing and the structuring of real estate transactions in New York.

The Bill is currently in committee. We will endeavor to keep you appraised of further developments. Please reach out to us with any questions or clarifications.