BILL NUMBER: S318
SPONSOR: SALAZAR
 
TITLE OF BILL:
An act to amend the real property law and the uniform commercial code,
in relation to requiring the recording of mezzanine debt and preferred
equity investments; and to amend the tax law, in relation to including
mezzanine debt in the mortgage recording tax
 
PURPOSE OR GENERAL IDEA OF BILL:
This bill would treat mezzanine debt and preferred equity investments
used to finance real estate purchases like a mortgage, subjecting it to
the same recording and taxation requirements.
 
SUMMARY OF PROVISIONS:
Section 1 amends the real property law by adding a new section 291-k
that defines "mezzanine debt" and "preferred equity investments" and
requires that they be recorded concurrently with a mortgage instrument
filed on a property with which mezzanine debt is associated.
Section 2 amends section 9-601 of the uniform commercial code by adding
a new subsection (h) to provide that a security interest in mezzanine
debt and/or preferred equity investment may only be perfected by the
filing of a financing statement under subpart 1 of part 5 of the arti-
cle.
Section 3 amends paragraph (a) of subdivision 2 of section 250 of the
tax law by providing that mezzanine debt and preferred equity invest-
ments are taxable.
Section 4 amends section 250 of the tax law to reference the definitions
of "mezzanine debt" and "preferred equity investment".
Section 5 amends section 253 of the tax law to define terms and estab-
lish the process by which mezzanine debt and preferred equity invest-
ments are taxed.
Section 6 amends subdivision 1 and paragraph (a) of subdivision 2 of
section 253-a of the tax law to add a tax shall be imposed on the filing
of certain financial statements.
Section 7 amends paragraph (a) of subdivision 1 of section 255 of the
tax law to establish that certain taxes shall apply to mezzanine debt
and or preferred equity investments.
Section 8 amends section 257 of the tax law to provide for the payment
of taxes on mezzanine debt and/or preferred equity investments.
Section 9 amends subdivision 1 of section 258 of the tax law prohibits
the recording of a mortgage of a property with related mezzanine debt
and/or preferred equity investments unless certain taxes on such debts
have been paid.
Section 10 provides the effective date.
 
JUSTIFICATION:
Mezzanine debt and preferred equity investment are forms of unsecured
debt often used to fund the purchase of investment properties. As these
debts are not secured against a property like a traditional mortgage,
the lender's decision to issue the debt is based on the credit worthi-
ness of the borrower. As a result, these types of debt instruments are
not available to everyday homebuyers, but rather to the institutional
investors and the extremely wealthy who purchase real estate with the
goal of making a profit.
While mezzanine debt and preferred equity investments used to finance
real estate purchases serve the same purpose as a mortgage, they are not
publicly recorded in the same way. The lack of transparency is problem-
atic: real estate speculators have a history of financing their
purchases of occupied rental housing with mezzanine debt--sometimes the
only type of financing they can acquire due to the riskiness of their
investments--and then rapidly raising rents to pay back the debt obli-
gation. Regulators and advocates with access to publicly recorded mort-
gage notes can calculate a property's debt service coverage ratio, which
can help identify an overleveraged building where rents are likely to
skyrocket, displacing tenants. But when a loan's term sheet is hidden,
as is the case with mezzanine debt, the public remains in the dark and
therefore vulnerable. Because the state lacks adequate oversight over
these types of debt, real estate speculators who want to shroud their
predatory business models from the public eye are incentivized to use
these types of financing as opposed to funding their property acquisi-
tions with a traditional bank-backed mortgage.
Not only are mezzanine debt and preferred equity investments currently
invisible to the public, they are also untaxed. With the astronomical
sums trading hands in real estate transactions with mezzanine debt play-
ing a major role, the state is currently forgoing possibly billions of
dollars of potential tax revenue that the state desperately needs to
fund unmet capital needs in its public housing.
This commonsense legislation creates parity between debt instruments
that serve the same purpose but are currently treated differently under
the law with the goal of steering real estate speculators towards osten-
sibly less volatile instruments provided by banks rather than private
equity. This legislation also creates more transparency in the market,
and raises badly needed tax revenue from corporations that can afford to
pay their fair share.
 
SOCIAL JUSTICE IMPACT:
This legislation creates more transparency in the market, helps to
prevent community de-stabilization, and raises desperately needed tax
revenue from corporations and other entities that can afford to pay
their fair share. This additional revenue can and should be used to fund
schools, hospitals, and other much-needed public services.
 
PRIOR LEGISLATIVE HISTORY:
SENATE
2020: S7231A (Salazar)- Referred to Judiciary
2021-2022: S3074 (Salazar)- Referred to Judiciary
ASSEMBLY
2020: A9041A (Epstein)- Referred to Judiciary
2021-2022: A3139 (Epstein)- Referred to Judiciary
 
FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS:
Potential to raise significant amount of new tax revenue.
 
EFFECTIVE DATE:
90 days after becoming law.

Statutes affected:
S318: 250 tax law, 257 tax law, 258 tax law, 258(1) tax law