In August 2020, the New York State legislature introduced a Mezzanine Debt Bill. The mezzanine debt law has now been reintroduced in both the Assembly and Senate and is expected to be passed in April 2021 as part of the state budget law. The Mezzanine Debt Bill would collect the tax on the collection of mortgages on mezzanine debt and preferred interests, and would require the mezzanine lender or preferred stockholder to file a Uniform Commercial Code (UCC-1) funding statement to protect its security interests Perfect collateral (i.e. the borrower's membership interests or stocks.)
overview
The act changes Section 291-k of the New York Real Estate Act to define "mezzanine debt" and "preferred equity investments" as
"Debt of a borrower that may be subordinate to the principal and that precedes the common stock of a company or the equity of the borrower and is classified as assets for the purpose of financing such a mortgage. This includes non-traditional financing techniques such as direct or indirect Investing a source of funding in a company that owns the (equity) portions of the underlying mortgage if the source of funding has specific rights or privileges such as: (i) the right to receive a special or preferential rate of return his capital investment and (ii) the right to accelerated repayment of the investor's capital contribution. "
The reference to "nontraditional finance techniques" is of concern to many in the financial services industry because it is so open and virtually any relationship could be subject to mortgage tax.
The Mezzanine Debt Bill also changes Section 250 of the New York State Tax Law and Section 9-601 of the New York Uniform Commercial Code to "record mezzanine debt every time a mortgage instrument is registered in the county registrar's office become." or a preferred equity interest in relation to the property on which the mortgage instrument is being submitted is also recorded with such mortgage instrument. "The Mezzanine Debt Bill also provides that" Mezzanine Debt and Preferred Equity Investments "are taxable and that tax is measured against the amount of" principal "obligations established by a security arrangement" in relation to real estate on which they are secured, A mortgage instrument is submitted. "One consequence of the compulsory record is that counties and cities could also impose a tax on the registration of the finance return, making the effective tax rate the same as the mortgage registration tax rate, which is 2.85 percent of the secured" debt "of commercial property in New York City valued at over $ 500,000.
The Mezzanine Debt Bill also changes Section 9-601 of the UCC to require the recording of a Funding Statement in the appropriate county records in order to perfect "a Mezzanine Debt Security Interest and / or Preferred Equity". This is particularly worrying for industry stakeholders as Section 291-k of the Real Estate Act provides:
"In order to secure a security arrangement in relation to mezzanine debt financing and / or preferential interests in relation to real estate on which a mortgage instrument is submitted, a secured party has no other remedy available under Article 9 of the Uniform Commercial Code, unless evidenced by a financing declaration for this Funding Declaration is being filed and the tax levied by the Department of Division Four of Section Two Hundred and Fifty-Three of the Taxes Act has been paid. "
Food stalls and reflections
Although the Mezzanine Debt Bill is aimed at real estate transactions, there is a very real possibility that it could be interpreted to include all financing transactions that even indirectly involve real estate, including corporate transactions where the target company or its subsidiaries include real estate used in its operations . There is also the problem of multi-state transactions that involve either parties owning real estate in New York or elsewhere, which also raises questions about what laws of state real estate in New York in a transaction with a connection with another state would regulate.
The review of the Mezzanine Debt Bill reveals that if it goes into effect, New York will become more expensive and mezzanine debt and preferred equity are likely to be less available than the other 49 states.
After the US $ 1.9 trillion bailout plan that will cut New York's budget deficit passes, many wonder if this is the time for New York lawmakers to experiment with an untested concept it is for New York-based reality makes estate harder to recover.