They’re back…not Poltergeist II, but Mortgage Recording Tax on Mezzanine Loans and Preferred Equity III…maybe…

For the third time in the past few years, New York mortgage recording tax (MRT) on mezzanine loans and preferred equity investments is back on the table. As of January 2023, the New York legislature is again considering levying its already costly mortgage recording tax (as of now only applicable to mortgages recorded on real property) on mezzanine loans and preferred equity investments (typically secured by a pledge of the borrower’s interest in the entity that owns the property).

What does this mean if passed?

Mezzanine loans and preferred equity investments would be subject to the tax – as much as 2.85% of the loan/investment amount on most New York City commercial real estate transactions. Mezzanine lenders and preferred equity providers would be required to file a Uniform Commercial Code Financing Statement (UCC-1) to perfect their security interest in the pledged collateral (which most now do in any event), but the statement would need to be filed and the tax would need to be paid in order to enforce their rights (to foreclose) under the applicable documents. As with mortgage loans, the tax would be passed on to borrowers, significantly increasing the cost of financing a real estate acquisition or refinancing – this would be added to the challenges borrowers are already facing due to the dramatic uptick in interest rates over the past year.

Industry Implications

If the market was not already chilled by rising interest rates, the passage of MRT on these subordinate financing options will no doubt further stymie real estate deal flow in New York. And even worse, we could see the tax extended to corporate financing transactions where the company/borrower utilizes real estate in connection with its business operations.

Potential Repercussions

While the intent to benefit New York residents by raising revenue through the tax may be bona fide, the resulting consequence may be that owners, operators and developers, as well as mezzanine lenders and preferred equity providers move their business to more tax-friendly states.