CRE Groups Seek to Defeat Proposed NY Tax on Mezzanine Debt, Preferred Equity

Industry groups in New York are seeking to defeat proposed state legislation that would require mezzanine and preferred equity agreements to be recorded as mortgages, claiming the law would impose recording taxes on such debt and would significantly increase the cost of those investments.

The legislation debuted in the New York State Assembly in January and seeks to require the recording of UCC financing statements for mezzanine debt and certain types of equity investments in real estate with underlying mortgage debt. It also would allow municipalities to collect recording taxes relating to those debts and investments. The bill is a new iteration of similar legislation proposed last year that did not advance in either of the state’s chambers.

The Commercial Real Estate Finance Council has come out swinging against the bill, saying the tax “could not come at a worse time for the New York real estate market, which has seen transaction volume plummet 40% from 2019 to 2020.” Additionally, a group of CRE associations including the Mortgage Bankers Association, have written the governor to lay out what the ramifications of the measure would be. “Increasing the cost and availability of mezzanine and preferred equity capital will directly impact the development of both affordable and market-rate apartments,” according to the letter. “Owners of other commercial real estate categories such as office and hotel will also be deprived of critical financing capital over and above what “conventional” lenders make available, which might lead to additional stress in the commercial real estate industry at a time when the average owner (and tenant) are already suffering.”

The legislation also carries with it some interesting legal challenges, according to a recent analysis by law firm Pillsbury.

“The result is that mezzanine lenders and covered equity investors will now need to navigate the requirements of multiple jurisdictions and each jurisdiction’s choice of law provisions in order to be certain that the transaction complies with all applicable laws,” Pillsbury attorneys wrote in a recent legal alert on the bill. “The real concern is not disputes between the creditor and the borrower, but rather intercreditor disputes, because different creditors may be able to claim a competing or even superior security interests according to the laws of different jurisdictions. These complexities can create opportunities for delays and challenges in consummating financing transactions and, upon default, in foreclosing on collateral. They also may give rise to potentially costly litigation.”

The tax was added by the Assembly in response to Gov. Andrew Cuomo’s 2021 budget, which the Assembly has until April 1 to pass a budget. At that point, Gov. Cuomo can either approve the budget or issue a line item veto on issues not included in his original version. The CRE Finance Council has also indicated that stand alone legislation may move forward this year as well.