Real estate makes last-minute push to kill proposed preferred equity tax

MBA, REBNY and other orgs push lawmakers to scuttle tax proposal

From left: Assembly member Harvey Epstein, State Sen. Julia Salazar,  MBA's Mike Flood and REBNY's James Whelan (Getty, Anuja Shakya/Whelan, MBA/Flood)
From left: Assembly member Harvey Epstein, State Sen. Julia Salazar, MBA's Mike Flood and REBNY's James Whelan (Getty, Anuja Shakya/Whelan, MBA/Flood)

Real estate players are using a letter-writing campaign and threats of lawsuits to try to stop a tax on preferred equity investors from advancing in state budget negotiations.

On Tuesday, 13 local and national real estate organizations sent a letter expressing concerns over the impending tax to Gov. Andrew Cuomo, as well as state Senate and Assembly leaders. The next day, the Mortgage Bankers Association, which organized the petition, encouraged its 80,000-strong membership to send automated letters to their representatives.

Meanwhile, lawyers at Greenberg Traurig have penned a memo to clients making a case that the proposed levy violates New York State’s constitution. Stephen Rabinowtiz, who leads the law firm’s real estate practice, said the memo is meant to educate its clients on how to protect themselves against the tax if implemented, which “could, if appropriate, include lawsuits.”

“We work for clients,” he said. “But if we have clients who were interested in challenging the constitutionality of the statute, we would consider doing that.”

The idea of taxing mezzanine debt and preferred equity investments, which is a common method for financing commercial real estate projects, is the brainchild of Sen. Julia Salazar and Assembly member Harvey Epstein. The legislators argue the move would bring additional transparency to the market and generate a stream of revenue destined for New York City’s embattled public housing projects. It’s projected to bring in $199 million next year.

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The proposed tax first surfaced in January 2020 and has found its way into the state’s budget resolutions. The industry opposed the tax when it was originally introduced and is now pulling out all the stops to stymie it.

“Anytime you have lenders, borrowers and unions who are on the same page on an issue, it’s probably time for policy-makers to pay attention,” said Mike Flood, MBA’s senior vice president of commercial and multifamily.

Other organizations that signed on to the letter include the Real Estate Board of New York, the International Council of Shopping Centers, CRE Finance Council and the Building & Construction Trades Council of Greater New York.

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In the letter, the group argued that the additional tax is likely to be passed on to cash-strapped landlords and their residential and commercial tenants.

“A tax on mezzanine debt and preferred equity is a tax on renters and small businesses,” the coalition wrote. They also argued the tax could deter developers from building affordable and market-rate housing.

In its memo, Greenberg Traurig also highlighted the tax’s unintended consequences while raising questions about the proposal’s constitutionality. Partner Glenn Newman, the former president of the NYC Tax Commission and the NYC Tax Appeals Tribunal, argued that the state’s constitution guarantees it will not tax “intangibles,” such as money deposited in a New York bank or brokerage or private equity investments.

Flood pointed out that there has never been a hearing on the proposed tax and that, based on recent statements from Cuomo and his budget director, Rubert Mujica, the additional revenue isn’t needed.

Cuomo and Mujica suggested during a Monday press conference that the $7 billion in taxes the legislature proposed are not necessary, as the state is receiving $12.6 billion in federal aid and higher-than-expected tax revenues.

Flood said he was open to discussing the goal of increasing transparency around previously undocumented financing, but expressed doubt that was the primary driver of the proposal.

“It’s about the tax,” he said. “If it’s about disclosure, let’s have that conversation.”

Flood confirmed the coalition had meetings with lawmakers on the books. When asked if investigations into Cuomo’s alleged sexual harassment were weighing on the industry, he said, “Our feelings on the tax bill would be the same no matter the dynamics in New York.”