Gibson Dunn | New York State Legislature to Pass New Home Debt Financing Tax

March 31, 2021

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New York State legislature appears poised to enact a new debt financing tax for commercial real estate transactions involving “mezzanine loans and preferred stock investments”[1] located only in New York, under the 2021-2022 budget.

Although similar bills have failed before, current bills appear likely to become law. The bill, reflected in Senate Bill S2509B Pt. SS and State Assembly Bill A03009B Pt. VV, would require that mezzanine debt and preferred stock investments be registered and taxed from the same way mortgages are now. However, the text of the bill leaves a number of important questions open to interpretation, including: whether the bill applies to debt and investments outside the real estate context; whether this would have a practical impact on preferred stock investments; and whether it will be applied retroactively.

The bill is also open to a variety of potential legal challenges, described below.

A 2.8% tax on “mezzanine debt or investment in preferred shares[s]”Used to finance real estate in New York

Under the bill, a lender who finances a property subject to a mortgage in New York[2] must also record “any mezzanine debt or investment in preferred shares related to the building on which the mortgage instrument is deposited”.[3] And just like registering a mortgage, registering mezzanine debt or preferred capital would be associated with a tax. The tax would be collected at the same rate and in the same manner as the tax “on the registration of a financing statement of a mortgage instrument”.[4] Currently, the New York mortgage registration tax on commercial properties is 2.8% of principal debt. Thus, borrowers from lenders whose interest is in the form of mezzanine debt or preferred shares would also have to pay an additional tax of 2.8% on the amount of debt financed under these instruments. All revenue from these new taxes would go to the New York City Housing Authority.[5]

If a lender holding mezzanine debt or preferred stock fails to account for debt or equity under the new law, or does not pay the associated tax, it will forfeit any “remedy otherwise available” under section 9. of the Uniform Commercial Code.[6] Remedies under the UCC are the usual route for owners of debt secured by interests in a legal person to seize such collateral in the event of default.

A lack of clarity

Many details of this new mezzanine debt tax remain unclear due to ambiguities in the text of the bill.

Magnitude and scope. The bill is drafted to apply to mezzanine debt or preferred stock investment “relating to … real estate” and secured debt “relating to real estate”.[7] However, the bill does not define when debt is considered “related to” or “in relation to” real estate. As such, the new law could be interpreted as covering and imposing any secured loan made to an operating company that happens to hold an indirect interest in New York City property. Such a broad scope would have profound implications for corporate debt transactions far beyond the world of mortgage debt financing. For example, a line of credit to an operating company secured by collateral on all of its assets, a small portion of which may include real estate in New York City, may be subject to tax under this bill. Among its ambiguities, the bill does not include any allocation of debt secured by equity interests in New York City real estate and other assets. In addition, it has become customary for mortgage lenders on real estate in New York – and other jurisdictions where there is a long period of time to complete a mortgage foreclosure – to require a pledge of equity interests in the mortgage. mortgage borrower as additional collateral for the loan. It is not clear whether the additional equity pledge would require payment of a second tax on the same loan when mortgage registration taxes have already been paid.

Retroactivity. Likewise, the bill does not specify whether it seeks to compel a lender to pay the registration tax for mezzanine debt or preferred shares already financed, or whether the tax would only apply to lending instruments. that occur after the bill is enacted. . However, given the well-established presumption against retroactive legislation, this same lack of clarity makes it likely that a court would interpret the bill so as not to impose a retroactive tax.[8]

Applicability of preferred shares. As mentioned above, a lender holding mezzanine debt or preferred stock that does not account would forfeit remedies otherwise available under section 9 of the UCC.[9] However, lenders who hold preferred equity investments generally do not pursue UCC remedies. Rather, because debt is structured as equity in a joint venture, defaults are treated as breaches of partnership contracts and remedies are governed by company and contract law. Thus, it is not clear whether the bill would have a practical impact in these cases.

Potential legal challenges

As drafted, the bill may be vulnerable to legal challenge on several grounds. In particular, any challenges will likely need to go to a New York State court, not a federal court. Under the Federal Tax Injunction Act, federal courts cannot prohibit “the assessment, collection or collection of tax under state law” when a remedy is available before the courts. state courts.[10]

Imprecision. As the scope of the bill is materially unclear, as noted above, it can be challenged as it is unconstitutionally vague, in violation of due process. A law is unconstitutionally vague when it “does not fairly inform the ordinary citizen that the prohibited conduct is illegal, [and] it lacks minimum legislative guidelines, which allows for arbitrary application[.]”[11] If expert industry players are unable to discern what types of transactions and investments are subject to the new tax, and different interpretations could include or exclude entire areas of debt transactions, then the bill could possibly be seen as “failing to give fair notice” and create opportunities for “arbitrary enforcement”.

Retroactivity. If the bill is interpreted to apply retroactively, it can be challenged under constitutional prohibitions against laws that “infringe upon the rights a party had when acting” or that “Impose[s] new obligations with regard to transactions already carried out. “[12]

Contract clause. Likewise, the contracts clause of the Constitution of the United States prohibits any state from “entering into[ing] any. . . Law affecting contractual obligations. “[13] To the extent that the bill is interpreted to weaken a remedy that a lender might otherwise have under a pre-existing contract, the new registration and tax hurdle of the bill is arguably unconstitutional. That said, the United States Supreme Court severely limited the scope of the contractual clause.[14]

Tax on intangible assets. Under the New York Constitution, s. 16, § 3, “[i]Tangible personal property is not taxed ad valorem and no excise tax is levied solely on account of its ownership or possession[.]The mortgage tax, on which the new bill is based, was considered not to violate this provision because it is “a tax on the privilege of registering a mortgage” and not a tax on a mortgage. property itself.[15] However, it can be argued that the new tax differs from this reasoning and does not defend itself under it. First, registration of mezzanine debt and preferred stock investments would be a requirement, not a lien, under the new bill.[16]; and second, the privileges associated with registering mezzanine debt and preferred shares would be far fewer and less important than those associated with registering a mortgage. On the other hand, the new bill probably requires registration only when a mortgage is also registered; and it would presumably grant Article 9 UCC remedies as a new lien associated with the registration of mezzanine debt and preferred equity investment.


If this bill were to pass – as it seems likely – the costs associated with financing commercial real estate transactions in New York would increase dramatically. However, the ambiguity of the bill in some key respects leaves open important areas of interpretation and possible legal disputes and challenges.


[1] New York State SB S2509B (2021), Pt. SS, § 1; New York State Assembly. B. A03009B (2021), pt. VV, § 1.

[2] See NYS Senate Bill S2509B, Pt. SS, §§ 1.1, 5.2 (2021) (“In a city of one million people or more …”). New York is the only city in New York State with a population large enough for this to apply.

[3] Identifier. in § 1.1.

[4] Identifier. in §§ 5.1–5.3, 5.6

[5] Identifier. at 7 O’clock.

[6] Identifier. § 1.4, 5.4.

[7] Identifier. §§ 1.4, 5.4.

[8] See St. Clair Nation v. New York City, 14 NY3d 452, 456–57 (2010) (“It is well established under New York law that retroactive application of legislation is not favored by the courts and laws will not be so interpreted. unless the wording expressly requires it or by implication necessary ”(internal quotation marks omitted)).

[9] Identifier. in §§ 1.4, 5.4.

[10] 28 USC § 1341.

[11] People Against Bright, 71 NY2d 376, 379 (NY 1988).

[12] Regina Metro. Co., LLC v. New York State Div. of Hous. & Cmty. Renewal, 35 NY3d 332, 365 (2020) (citing Landgraf v USI Film Prods., 411 US 244, 278-80 (1994)).

[13] US Const., Art. I, § 10, cl. 1.

[14] See, for example, Sveen vs. Melin, 138 S. Ct. 1815, 1821 (2018).

[15] SS Silberblatt, Inc. v Tax Commission, NY2d 635, 640 (NY 1959); see also Franklin Soc. for Home Bldg. & Sav. against Bennett, 282 NY 79, 86 (NY 1939).

[16] Compare NY RPP 291 (“A transfer of real estate… can be registered”) with Section 1.1 (“any mezzanine debt or investment in preferred shares… will also be recorded”).

Gibson Dunn attorneys are available to answer any questions you may have regarding these developments. Please contact the Gibson Dunn attorney you normally work with, any member of the firm Real Estate Practice Group, or the following authors in New York:

Andrew J. Dady (+ 1212-351-2411, [email protected])
Brian W. Kniesly (+ 1212-351-2379, [email protected])
Andrew A. Lance (+ 1212-351-3871, [email protected])

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