Earlier this year, Senator Julia Salazar and Assembly Member Harvey Epstein introduced a bill (S7231/A09041) in the New York State Legislature proposing to charge a recording tax (similar to the mortgage tax) on mezzanine debt financings to help fund public housing. On August 17, 2020, an updated version of the bill was introduced in the New York State Assembly that proposed extending the application of the mortgage recording tax to preferred equity investments.

The updated bill defines mezzanine debt and preferred equity investments as “debt carried by a borrower that may be subordinate to the primary lien and is senior to the common shares of an entity or the borrower’s equity and reported as assets for the purposes of financing such primary lien. This shall include non-traditional financing techniques such as a direct or indirect investment by a financing source in an entity that owns the equality [sic] interests of the underlying mortgage where the financing source has special rights or preferred rights such as: (i) the right to receive a special or preferred rate of return on its capital investment; and (ii) the right to an accelerated repayment of the investors capital contribution.”

If this bill were to pass, it would clearly have a substantial impact on how mezzanine loans and preferred equity investments are structured and would significantly increase the transaction costs for these types of transactions (the costs of which likely would be passed onto the borrowers/recipients of the capital). It could even result in a practice, which has been in place for years with mortgage loans, of allowing borrowers to arrange to “assign” this subordinate “debt” to new lenders in connection with refinancing in order to save on the payment of the new tax.

It is unclear whether this rather poorly drafted bill will gain any traction, but given the fiscal shortfalls impacting New York state as a result of the COVID-19 pandemic, some commentators have suggested that there could in fact be strong support for it. To date, the Cuomo administration has not taken a position as to whether or not it would support the bill. We will continue to monitor the progress of this bill and any changes to it, and will provide further updates.

Originally published by Morrison & Foerster, August 2020