New York State Assembly Proposes Legislation to Impose Recording Taxes on Mezzanine Debt and Preferred Equity Investment Financings

By October 1, 2020Articles

By Sharon V. Skolnik, Esq., Stempel Bennett Claman & Hochberg, P.C. | September 15, 2020

Commercial real estate developers often turn to mezzanine debt or preferred equity financing to supplement traditional mortgage loans to finance the acquisition, construction and development of real property.  Mezzanine debt is subordinate to a traditional mortgage loan or senior debt and typically is secured by a subordinate note and a pledge of the ownership interests of the borrower and/or its affiliates.  These types of transactions are governed by the Uniform Commercial Code (“UCC”).  Parties to mezzanine debt transactions perfect and enforce their agreements using procedures outlined in the UCC.  Preferred equity investors provide funding to real estate projects by taking an equity stake in a company by obtaining an ownership interest in the borrower and being admitted as a member, limited partner or being issued preferred stock in exchange for a preferred return of cash flow or profits after the payment of all senior debt.  Except for filing requirements under the UCC to secure mezzanine debt, traditionally, these types of financing transactions have not been subject to recording requirements or subject to taxation.  This may soon change.

Legislation is pending in Albany that, if enacted, will have a significant impact on financing certain commercial real estate transactions in New York State.  If passed in its present form, New York State Assembly Bill No. 9041-A will amend the real property law and the UCC to require the recording of mezzanine debt and preferred equity investments in the real estate records.  The proposed legislation also will amend the tax law to require payment of recording tax on mezzanine debt and preferred equity investments related to real property.  These changes will add significant costs to mezzanine debt and preferred equity investment transactions.  For instance, the recording tax imposed for mezzanine debt or a preferred equity investment of $10,000,000 for a property located in the City of New York is calculated at 2.8% of the total amount of the note or the investment, which would total $280,000.

The proposed amendments will impact how mezzanine debt lenders and preferred equity investor perfect and enforce their loans and investments.  Under current law, in order to enforce its loans, a traditional mortgage lender must record its mortgages in the real estate records and a mortgage tax based on the amount of the debt is due and payable at the time of recording.  Currently, there is no requirement to record mezzanine debt or preferred equity investment instruments related to real property in the real estate records.  However, the proposed legislation expands the definition of “mortgage” to include a “financing statement that evidences a security agreement” and subjects the filing of such instruments to a recording tax at the time of filing.

Once the proposed legislation is enacted, the perfection, taxation and certain aspects of enforcement of mezzanine debt and preferred equity investments will be treated similar to the enforcement of mortgages.  Under the proposed legislation, a financing statement will be required to be filed in the real property records for mezzanine debt and preferred equity investments with a recording tax on the amount of the debt and/or equity investment to be imposed at the time of filing.  These filings will be taxed at the same rates imposed for recording mortgages.  Additionally, enforcement of mezzanine debt and preferred equity investments under Article 9 of the UCC is prohibited and no instruments evidencing the debt or equity investment can be introduced into evidence in any action or proceeding unless a financing statement is filed in the real estate records and the recording tax is paid.  If mezzanine debt or preferred equity investments are made prior to or after the recording of a mortgage without filing a financing statement and paying the recording tax, no mortgage or mortgage extension will be accepted for recording and no mortgage will be released, discharged or assigned of record until the financing statement for the mezzanine debt and/or preferred equity investment is filed and the recording tax is paid.  The bill does have a carve-out for mezzanine debt and preferred equity investments on residential coop apartments, where the owner is a shareholder of the ownership entity, has exclusive occupancy of the apartment and has entered into a proprietary lease.  Also, in its present form, the bill does not include any amendments to Section 577 of the Tax Law, which exempts mortgage recording taxes for real property owned by a housing development fund corporation (“HDFC”).  Under the proposed amendments to the real property law and tax law, in order to perfect and enforce a preferred equity investment, such as a tax credit equity investment, for an affordable housing development, the investor would be required to file a financing statement in the real estate records.  However, unless amended, current Section 577 of the Tax Law would shield affordable housing developers from recording tax liability for affordable housing projects financed by tax credit equity for properties owned by an HDFC.

There is a possibility that existing law would exempt mezzanine debt and preferred equity investments from the recording tax under certain circumstances.  Under the current law, a mortgagee can take an existing mortgage by assignment and consolidate it with new sums advanced.  In this instance, the borrower/mortgagor is exempt from mortgage recording taxes on the amount of the existing mortgage.  Presumably, since financing statements filed for mezzanine debt and preferred equity investments will be treated the same as “mortgages” under the proposed amendments, unless Section 255 of the Tax Law is further amended, mezzanine debt lenders and preferred equity investors would be able to assign their debt and preferred equity investments and the borrowers would be able to avail themselves of the supplemental mortgage provisions of current Section 255 of the Tax Law, which would exempt these borrowers from additional recording taxes so long as an amendment to the existing financing statement is filed and no new debt or equity is secured by the existing financing statement.  Only additional mezzanine debt or additional preferred equity investment above and beyond the existing mezzanine debt and existing preferred equity investment would be subject to the recording tax, provided that an affidavit requesting an exemption for the recording tax paid on the existing mezzanine debt or existing preferred equity investment is filed with the amendment to the financing statement.

While the imposition of new taxes tends to be highly unpopular, due to the current, uncertain economic climate hastened by the pandemic, this bill still has a good chance of being passed, primarily because: (i) it mainly impacts large, sophisticated commercial real estate transactions; (ii) it will provide a desperately needed tax revenue source; and (iii) it will not directly impact the majority of New York State voters.


1 See Uniform Commercial Code (UCC) Article 8 – Investment Securities and UCC Article 9 – Secured Transactions.

2 See UCC § 9-312.

3 See NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Real Property Law § 291-k(1) Recording of Mezzanine Debt and Preferred Equity Investment.  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Real Property Law § 291-k(2).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253-A(1).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253-A(2)(a).

4 See NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253(4)(a).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253(4)(f).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253-A(1).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253-A(2)(a).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 255(1)(a)(iii).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 257.

5 See NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253(4)(a).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253(4)(c).  See also New York Tax Law § 253-A (Recording Tax by a City of $1million or more)

6 See New York Tax Law § 253 (Recording Tax); See also New York Tax Law § 253-A(2); See also New York Tax Law §253-C through §253-Y*3 (Recording Tax by Various Counties in New York State).

7 See NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253(4)(c).

8 See NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 250(a)(3). See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253(4)(a).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 258(1).

9 See NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253(4)(d).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253(4)(f).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed UCC § 9-601(h).

10 See NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253(4)(a).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253-A(1).

11 See NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 250(a)(3). See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253(4)(b).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253(4)(f).

12 See NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253(4)(d).

13 See NYS Assembly Bill No. 9041-A, January 10, 2020; proposed amendment to New York Tax Law § 258(1).

14 See NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Real Property Law § 291-k(3).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed UCC § 9-601(h)(3).

15 See NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Real Property Law § 291-k(1) Recording of Mezzanine Debt and Preferred Equity Investment.  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Real Property Law § 291-k(2).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253-A(1).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253-A(2)(a).

16 See New York Tax Law § 577(2).

17 See New York Tax Law § 255.

18 See New York Tax Law § 255(2)(a). See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 250(a)(3). See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 253(4)(a).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 258(1).  See also NYS Assembly Bill No. 9041-A, January 10, 2020; proposed New York Tax Law § 255(1)(a)(iii).

19 See New York Tax Law § 255(1)(a).  See also See New York Tax Law § 255(2)(a).