New York State considers new property taxes

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Key points

  • New York state lawmakers, seeking to close the gap in the state’s annual budget, consider tax hikes of nearly $ 7 billion in a package that includes taxes on fundraising mezzanine and on preferred shares, as well as a tax on individuals owning a second home. in New York (commonly known as the “pied-à-terre” tax).

  • The proposal would subject mezzanine financing and preferred share financing to mortgage registration tax. It would also require mezzanine lenders and preferred stock investors to file a Uniform Commercial Code (UCC) Funding Statement in county land registers in order to perfect their security interests and allow them to exercise section remedies. 9 of the Uniform Commercial Code.

  • The pied-à-terre tax would authorize additional taxes on single-family, two-family and three-family homes with a market value greater than $ 5 million and condominium units and co-ops with a taxable value greater than $ 300,000.

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The deadline for the New York State Legislature to pass a new budget for the 2021-22 fiscal year is April 1. consider new taxes to increase income. This opinion summarizes two new taxes under study that would affect the real estate sector: a proposed tax on mezzanine financing transactions and on privileged equity and a new tax on high value pied-à-terre second homes.

Tax on mezzanine financing and preferred share financing

Finance bills before the New York Senate (S. 2509-B, Part SS) and Assembly (A. 3009-B, Part VV) would revise Section 291-k of the New York Tax Act to subject mezzanine financing and preferred share financing to the New York mortgage registration tax (collectively, the Mezzanine tax). Mortgage registration tax should be paid on the principal amount of such mezzanine and preferred share financing, when such debt or financing is “tied to the building on which a mortgage instrument is deposited” (that is to say, where mezzanine or preferred stock financing is subordinated to primary mortgage debt). The bill defines “mezzanine debt” and “preferred stock investments” as:

“[D]Debt held by a borrower that may be subordinate to the primary lien and has priority over the common shares of an entity or over the borrower’s equity and presented as an asset for the purpose of funding that primary lien. This includes non-traditional funding techniques such as direct or indirect investment by a funding source in an entity that holds the interests in the underlying mortgage when the funding source has special rights or privileged rights such as : (i) the right to receive a special or preferential rate of return on its capital investment; and (ii) the right to accelerated reimbursement of the capital contribution from investors.

The vagueness of this description opens the door to the possibility that the mortgage registration tax may apply in contexts other than typical real estate mezzanine financing and preferred share financing, such as corporate finance transactions where the underlying assets include real estate and possibly certain joint ventures where investors are entitled to what could be interpreted as a “preferred rate of return”.

In addition, for any mezzanine or preferred stock financing related to real estate on which a mortgage is to be deposited, a UCC financing statement should be filed with the mortgage instrument in the land registers of the county where the mortgage is deposited. Section 253 of the New York Tax Act and Section 9-601 of the New York UCC would be revised to provide that (1) remedies under the UCC would not be available to the mezzanine lender or preferred stock investor unless mortgage tax is paid, and (2) a security interest in such mezzanine debt or preferred stock investment can only be perfect if a UCC funding statement is filed. The provisions of the bill that refer to the perfection of collateral and remedies under UCC in the context of preferred stocks are particularly puzzling, given that preferred stock investments are generally not structured as secured transactions. under Article 9 of the UCC. A preferred investor would generally not have a guaranteed interest in a collateral or file a UCC funding statement, and the preferred investor’s remedies are generally contractual in nature and do not arise out of the UCC.

The proposed mezzanine tax would impose both the state mortgage registration tax on mezzanine finance and preferred stock transactions and allow counties and cities to impose local mortgage registration taxes on those transactions as well. Mortgage registration taxes vary from one locality to another; however, in New York, the combined state and local mortgage registration tax is 2.80% of the principal amount for principal debt greater than $ 500,000. It goes without saying that the application of mortgage registration taxes to mezzanine and preferred stock transactions that until now have been exempt from such charges will have significant impacts on borrower financing decisions.

Beyond the obvious question of the additional tax burden the mezzanine tax would impose on mezzanine and preferred stock borrowers, the other proposed changes to be enacted, along with the mezzanine tax, pose troubling questions such as:

  • Will mezzanine lenders be allowed to take advantage of the mortgage practice of outgoing lenders ceding existing debt to incoming lenders in order to reduce the costs of the mortgage registration tax? How would this work in the context of preferred equity financing, where “debt” is equity participation in an entity rather than debt evidenced by a rating?

  • Will the mezzanine tax be interpreted as applying to other financing transactions which only indirectly concern real estate interests? for example, corporate-level debt secured by indirect interests in assets that include real estate, or even some joint ventures where an investor is entitled to a “prime rate of return”? The inclusion of language in the New York Senate and Assembly budget bills stating that “non-traditional financing techniques” will be subject to the mortgage registration tax, indicates that this may be the case. case.

  • How will the mezzanine tax be applied in multi-state transactions involving multiple real estate assets located in other states, as well as New York?

Pied-à-terre tax

Another new tax being considered by the New York state legislature would allow cities of at least 1 million people (in fact, New York City alone) to impose new taxes on high-value second homes. (the pied-à-terre tax). The pied-à-terre tax would apply to single-family, two-family and three-family residences with a market value greater than $ 5 million (calculated based on the average value of the property over the past five years), as well as condominiums and cooperative units whose assessed value exceeds $ 300,000. Houses used as primary residences, either by the owner or by the owner’s parents or children, would be exempt from the tax.

The bill would authorize additional annual taxes on buildings subject to the tax as follows:

  • For single-family, two-family and three-family residences subject to the tax, a rate of at least half a percent and at most four percent on the amount of the market value of the building that exceeds $ 5 million; and

  • For condominiums and cooperatives subject to the tax, a rate of at least 10% and at most 13.5% on the amount of the assessed value of the immovable (or, in the case of a cooperative, the assessed value attributable to the relevant shareholder) that exceeds $ 300,000.

New York state lawmakers have introduced bills to implement a pied-à-terre tax in various forms over the past few years without success, and now the pied-à-terre tax has de again was reinstated due to the state’s budgetary difficulties. Previous versions of the pied-à-terre tax proposed by the New York State Legislature included additional exemptions from the tax, such as an exemption for full-time leased properties, which are missing from the current version. of the tax. The proposed version of the tax currently before New York state lawmakers exempts only homes used as a primary residence by owners or their parents or children, as noted above.

At the time of this writing, the pied-à-terre tax has only been included in the New York State Assembly Budget Bill (A. 3009-B, part WW) , but the New York State Senate has so far chosen not to include the pied-à-terre in its budget bill (S. 2509-B). It remains to be seen whether the two chambers of the state legislature will reconcile the difference to include or remove the pied-à-terre tax from the final finance bill.


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