Alternative Investment

UPDATE: Proposed Taxes On Mezzanine And Preferred Equity Financing Resurface In New York Legislature – Charges, Mortgages, Indemnities

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Key Points:

  • New York lawmakers have reintroduced legislation that, if
    adopted into law, would make mezzanine and preferred equity
    financing subject to the mortgage recording tax.

  • The legislation would also require mezzanine lenders and
    preferred equity investors to file UCC-1 financing statements in
    the county land records in order to perfect their security
    interests and enable them to exercise remedies under Article 9 of
    the Uniform Commercial Code.

  • Proposals for mezzanine and preferred equity taxes were
    introduced by lawmakers during the 2019–2020 and
    2021–2022 legislative sessions, but in each case were not
    adopted into law before the end of the legislative session.

On January 4, New York lawmakers introduced legislation in the
New York State Senate that would require mortgage recording tax to
be paid on mezzanine and preferred equity financing in cases where
such financing is subordinate to primary mortgage debt (a Mezzanine
Tax). The same legislation was introduced in the New York State
Assembly on January 9.

This is the third straight legislative session in which New York
lawmakers have pushed to enact a Mezzanine Tax. The same
legislation had been proposed in the 2019–2020 and
2021–2022 legislative sessions, but in each case the proposal
died in committee when the legislative session ended. A proposal to
include a Mezzanine Tax in the state’s 2021–2022 budget
also failed.

Although those efforts failed, New York lawmakers have revived
Mezzanine Tax legislation for the 2023–2024 legislative

If adopted into law, the proposed Mezzanine Tax would impose
mortgage recording taxes on mezzanine and preferred equity
financing transactions where the mezzanine or preferred equity
financing is “related to the real property upon which a
mortgage instrument is filed.” The mortgage recording tax in
New York State varies by locality but can be as high as 2.8 percent
in New York City for mortgages on commercial real estate with
principal amounts over $500,000. Remedies under the New York
Uniform Commercial Code (UCC) would not be available to the
mezzanine lender or preferred equity investor unless the mortgage
recording tax was paid.

The legislation also would amend the UCC to provide that a
security interest with respect to such mezzanine debt or preferred
equity investment may be perfected only if a UCC-1 financing
statement is filed.

The persistence of Mezzanine Tax legislation in the New York
legislature is troubling, in part because of the obvious additional
tax burdens that a Mezzanine Tax would impose on mezzanine and
preferred equity borrowers. Other concerns include:

  • Due to the vagueness of the language included in the Mezzanine
    Tax legislation (which states that the Mezzanine Tax would apply to
    “non-traditional financing techniques”), the Mezzanine
    Tax could be held to apply to financing transactions where real
    estate is not the primary focus of the transaction, or in other
    contexts where mortgage recording tax would not be expected to be
    applicable. For example, the Mezzanine Tax might be construed to
    apply to corporate financing transactions where the underlying
    assets include real estate, or in a joint venture where one
    investor has a right to a preferred rate of return.

  • The application of the proposed Mezzanine Tax in the context of
    preferred equity is unclear. The Mezzanine Tax legislation
    references security interests and remedies under the UCC. However,
    unlike mezzanine loans, preferred equity investments typically are
    not secured by security interests under the UCC, and a preferred
    equity investor would not typically file a UCC financing

  • It also is not clear whether mezzanine lenders or preferred
    equity investors would be permitted to assign existing debt (or, in
    the case of preferred equity investors, to assign existing
    preferred equity) to incoming lenders in order to reduce mortgage
    recording tax costs, as is the case with mortgage lenders.

  • Another question is how the Mezzanine Tax would be applied in a
    multistate transaction involving multiple real property assets
    located in New York and other states.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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