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Proposed NY Tax on Mezzanine Debt, Preferred Equity Gets Defeated—for Now

In January 2021, some New York State legislators refiled legislation to record mezzanine debt and some types of preferred equity investments as mortgages and require taxes on them.

Some commercial real estate groups strongly objected, and it looks like their efforts did the trick as the mezzanine debt and preferred equity tax was removed from the New York State budget, according to William Kooper, vice president of state government affairs and industry relations, and Grant Carlson, policy advisor for commercial/multifamily, at the Mortgage Bankers Association, writing for Trepp. 

Law firm Pillsbury Winthrop Shaw Pittman posted an analysis of the latest bill along with a number of observations, like “it is not a stretch to imagine that this provision (and the balance of the amendments, read as a whole) could be interpreted to require (and that recording and filing offices might interpret this language as requiring) the filing of a financing statement in connection with any new mezzanine debt—even if created later than (and therefore not concurrently with) a mortgage loan.”

The firm also suggested that “the breadth of the statute suggests the possibility that any financing transaction that in any way involves interests in real estate also might be covered” and that amendments to the UCC were “particularly perplexing.”

In March, the Commercial Real Estate Finance Council said 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.”

A group including the Mortgage Bankers Association wrote Gov. Andrew Cuomo and other state government leaders, saying they believed “the enactment of these taxes would exacerbate the affordable housing challenges in New York and effectively increase rents on low to middle-income New York families and small businesses, at a time when they can least bear that increase.” Increasing the cost of credit while imposing an estimated $171 million in taxes.

The MBA’s Carlson and Kooper wrote that while the governor’s budget didn’t include the tax, “in a dramatic move just two weeks before the budget was due, both the Senate and Assembly added it to their revenue plans.”

However, removal of the provision after education and lobbying is no guarantee for the future, as Carlson and Kooper note. “Notably, the standalone bills on this issue could still be passed and enacted before the New York Legislature is scheduled to adjourn in mid-June,” they wrote.
Reprinted with permission from the Thu, 13 May 2021 07:24:29 EDT online edition of GlobeSt © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.