Final Regulations and New Guidance Regarding Loan Modifications for REMICs Holding Commercial Mortgage Loans
On September 15, 2009, the IRS released final regulations and a Revenue Procedure addressing modifications to commercial mortgage loans held by real estate mortgage investment conduits (“REMICs”). The new regulations are designed to “accommodate the evolving practices in the commercial-mortgage industry,” while the Revenue Procedure addresses “[t]he current situation in the credit markets … affecting the availability of financing and refinancing for commercial real estate.”
Revenue Procedure 2009-45 describes when changes to certain commercial mortgage loans made to prevent a default on the loan will not cause the IRS to challenge the tax status of certain securitization vehicles, including REMICs, or to assert that such modifications constitute prohibited transactions. The provisions of the Revenue Procedure will apply if, based on all the facts and circumstances, the holder or servicer reasonably believes that there is a significant risk of default on maturity or sooner and that the modification will substantially reduce the risk of default, provided that certain additional requirements are met. Prior to the issuance of this Revenue Procedure, a commercial mortgage loan that was “significantly modified” would fail to be a qualified asset of the REMIC, jeopardizing the REMIC’s tax status unless default occurred or was reasonably foreseeable, which was typically viewed as a loan that was not performing or for which default was imminent. The ruling reduces this standard for modification to “significant risk of default,” even if the loan is performing. Thus, the ruling creates the potential for special servicers to modify loans before they enter default. Notwithstanding the ruling and the relaxation of the standard from a tax perspective, servicers may continue to be constrained in their ability to modify otherwise performing commercial mortgage loans by the terms of their applicable servicing agreements.
Treasury Decision 9463 amends Treasury Regulations governing REMICs by allowing certain changes to obligations held by REMICs that will not jeopardize the REMIC’s tax status. These changes include certain changes in collateral, guarantees, credit enhancement and the recourse nature of an obligation. Additionally, under certain circumstances a real property lien securing a mortgage may be released without causing the mortgage to lose status as a qualified REMIC asset. The regulations require that a mortgage loan continues to be “principally secured by an interest in real property” after the modification or release.