USA Law and Practice Contributed by: Richard L. Rosen, Leonard S. Salis and Dennison Marzocco, Rosen Karol Salis PLLC
state to state. For example, in New York City, the mort - gage recording tax requires purchasers to pay 1.8% on mortgage amounts under USD500,000 and 1.925% on mortgage amounts exceeding USD500,000. 3.5 Legal Requirements Before an Entity Can Give Valid Security In order for a security interest to attach to collateral, the debtor entity must enter into a security agreement with the lender and provide proof that it has clear title to the collateral. The mortgage or deed of trust must then be publicly registered where the land is located in order for the lender to establish the security interest in the real property. 3.6 Formalities When a Borrower Is in Default When a borrower is in default of a loan secured by a mortgage on commercial property, the lender may pursue a “foreclosure” of the mortgage. The foreclo - sure process varies from state to state. In New York, for example, all foreclosures are judicial foreclosures (requiring a lawsuit to be commenced). In many states, liens follow the “first in time, first in right” rule, meaning that whichever lien is recorded first will have priority when the funds from a foreclo - sure are paid. However, there are exceptions – for example, judgment liens typically have a lower prior - ity than mortgage liens. Also, state law may prioritise certain types of liens, such as tax liens. Parties may also agree that certain liens may be or become “sub - ordinate” to certain other liens (see 3.7 Subordinating Existing Debt to Newly Created Debt ). Foreclosure actions may take about 15 months to be concluded. There is an active market in the USA for non-perform - ing notes (NPNs), although the size of the market var - ies and is spread among institutional buyers, hedge funds, private equity firms and institutional investors. NPNs are typically acquired at steep discounts, to be renegotiated, foreclosed upon or resold. 3.7 Subordinating Existing Debt to Newly Created Debt When a new creditor wants to become the senior lender, the existing lender must consent to “subordi - nate” its superior claim, which is achieved through a subordination agreement defining the creditors’ prior -
ity. While subordination may seem disadvantageous, it can be advantageous, such as when a lender agrees to subordinate its mortgage to a construction loan to improve the property’s marketability. These arrange - ments are frequently negotiated and agreed upon in advance. Some buyers consolidate and extend exist - ing and new debt (“consolidation and extension”) over the property. 3.8 Lenders’ Liability Under Environmental Laws Generally, a lender cannot be so liable, provided that it does not participate in the management of the proper - ty or participate in, create or make the environmental issue worse, and that it obtains an exemption under CERCLA. 3.9 Effects of a Borrower Becoming Insolvent A borrower’s insolvency does not typically affect the validity of a mortgage granted to secure an obligation (although in a sophisticated commercial development transaction a lender could require a borrower to main - tain solvency for development to continue). However, the filing of a bankruptcy petition has the immediate effect of staying the foreclosure process. A lender can seek relief from the automatic stay to enforce its secu - rity interest, if it shows “cause”, such as the debtor having no equity or uninsured property. If granted, the lender can proceed outside the bankruptcy. 3.10 Taxes on Loans States and municipalities typically leverage taxes on newly recorded mortgages. See 3.4 Taxes or Fees Relating to the Granting and Enforcement of Secu- rity for an example of the recording taxes imposed by New York State and the City of New York. Mezzanine loans, unlike traditional mortgages, are secured by a pledge of equity interests in the entity owning the real estate rather than by a direct lien on the property. As a result, they are generally not subject to traditional mortgage recording taxes in most jurisdictions. First introduced in January 2020 and reintroduced in every legislative session since – most recently in early 2025 as S318 in the Senate and A407 in the Assembly – the Mezzanine Debt Bill would impose a mortgage recording tax-equivalent on the creation of mezzanine debt and preferred equity investments secured by
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