The New York State Senate and Assembly are proposing legislation (Senate Bill S3074 and Assembly Bill A3139) which would require the recording of, and the payment of recording tax on, certain mezzanine loans and preferred equity investments. Recordation would be accomplished through the filing of financing statements. Initial drafts of the 2021 New York State budget bills included similar recording requirements and taxes, but ultimately the budget passed on April 7, 2021 without these requirements. If the proposed bills are passed, mezzanine loans and preferred equity investments would be treated in a similar fashion as mortgage loans in New York State, which would substantially increase the cost and complexity of structuring transactions that utilize mezzanine debt and/or preferred equity. Multiple high-profile lenders, borrowers, principals and other real estate organizations are campaigning against the proposed legislation.
The proposed bills would mandate a recording tax on mezzanine debt and preferred equity investments in an amount up to approximately 2.8% of the principal debt or preferred equity amount. Additionally, recording would be required and accomplished through the filing of financing statements, which could create transparency and disclosure issues for mezzanine debt and preferred equity participants. In connection with these changes, revisions are being proposed to the New York Uniform Commercial Code (the “NY UCC”). The current iterations of the bills do not clearly state and it is too early to tell: (i) what would occur if the NY UCC conflicts with another state’s UCC, (ii) what effects the proposed recording/filing requirements would have on the preferred method of “perfection by control” currently used by mezzanine lenders, and (iii) how existing mezzanine debt and preferred equity investments would be impacted.
Seward & Kissel LLP is closely monitoring the situation as the bills progress through their respective Judiciary Committees. Please do not hesitate to reach out to a member of the Seward & Kissel team with any questions.