Assembly Bill A03139, introduced January 22, 2021, and Senate Bill S03074, introduced January 27, 2021, aim to rewrite portions of the State’s real property law, tax law and uniform commercial code to require that both “mezzanine debt” and “preferred equity investments” be recorded contemporaneously with mortgage instruments in county recorder’s offices. The 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.”
Previously, only traditional first-priority mortgages were required to be recorded, and with that recording came a hefty mortgage recording tax – generally around 1% throughout the State, with additional taxes being levied in the New York City metropolitan district. The proposed bill, however, would place both mezzanine debt and preferred equity investments on the same plane as traditional mortgages by requiring financing statements to be recorded and recording tax to be paid at the State level when mezzanine debt facilities or preferred equity investments are in place. To ensure compliance, regardless of whether a first-priority mortgage has been simultaneously recorded, the bill prevents the perfection of a security interest in mezzanine debt or preferred equity investments until after any applicable recording taxes have been paid.
Sponsors of the bill have criticized mezzanine debt and preferred equity investments as volatile debt instruments prone to over-leveraging. Unlike traditional mortgages, mezzanine debt and preferred equity investments are not recorded in public registries and are therefore untaxed and largely unregulated. As a result, the sponsors argue, such financing methods are more likely to cause predatory practices. This bill would aim to reduce that risk by creating parity between the various debt instruments commonly put to use.