Proposed Recording Tax on Mezzanine Loan and Preferred Equity Investments Not Part of the New York Budget, Standalone Bills Remain

The New York State budget adopted on April 7 passed without the proposed recording tax on mezzanine loan and preferred equity investments. Standalone Senate and Assembly bills – S3074 and A3139 – remain as renewed attempts to pass these recording taxes. The proposed legislation would require: (i) financing statements perfecting security interests for mezzanine debt and preferred equity interests related to New York real estate to be filed in the land records and (ii) the payment of a mortgage recording tax on these investments of up to 2.8% of the principal debt or preferred equity amount. The money raised from the new recording tax would be earmarked to fund mass transit operations and the New York City paratransit system. The proposed legislation would increase the costs of making equity investments and mezzanine loans through the payment of the tax, in addition to requiring investors to navigate potentially conflicting requirements of New York with other jurisdictions. For example, a security interest related to mezzanine debt on a New York property owned by a Delaware entity may be perfected under Delaware law but not under New York law after the proposed changes.

The bills specify that a security interest for mezzanine debt related to New York real estate would be unperfected unless a financing statement was filed in the New York land records and the recording tax paid. In the event of a bankruptcy proceeding, this could result in the mezzanine lender’s treatment as an unsecured creditor in certain circumstances.

The bills would also change the New York Uniform Commercial Code to require filing the financing statement in the land records and paying the mortgage recording tax before a mezzanine lender could exercise its Article 9 remedies. The bills are less clear on how preferred equity investments would be affected as preferred equity holders would not generally exercise Article 9 remedies.

The proposed legislation leaves several open questions related to how the legislation’s change to the New York UCC would interact with conflicting UCC provisions of other states and if existing mezzanine debt would be affected, among other matters. The law does not specify whether the filing requirement applies only to new mezzanine debt or preferred equity issuances. As the bills move through the Judiciary Committees, these questions will likely be raised and the bills may be revised in attempts to address them.

We are tracking the bills and will keep you updated on further developments. Please reach out to us with any questions or clarifications.

Relevant Links (for reference):

• Senate Bill S3074
• Assembly Bill A3139