The Treasury Department released new tax rules that make it easier for property owners to restructure loans that were packaged and sold as Commercial Mortgage Backed Securities. The IRS passed relief for residential mortgage packed securities in May, 2008.
Until now, tax rules have made it impossible for borrowers who are not in default to hold restructuring talks. Altering the terms of a mortgage that is part of a CMBS has a nuclear tax result. Only those loans that are actually delinquent could be modified. The loan servicers were unable to modify terms to prevent a default.
The new guidance from the Treasury makes it clear discussions involving lowering the interest rate or stretching out the loan term “may occur at any time” without triggering tax consequences. In addition, the guidance allows servicers to modify loans regardless of when they mature. The servicer only has to believe there is “a significant risk of default” upon maturity of the loan or at an earlier date and that “the modified loan presents a substantially reduced risk of default”.
The IRS also issued final regulations that expand the list of permitted loan modifications to include certain modifications that are often made to commercial mortgages. The regulations expand this list of permitted exceptions to include changes in collateral, guarantees, and credit enhancement of an obligation and changes to the recourse nature of an obligation.
References:
- Revenue Procedure 2009-45
- IRS Notice 2009-79
- TD 9463 final regulations that expand the list of permitted loan modifications to include certain modifications that are often made to commercial mortgages
- New Rules Ease the Restructuring of CMBS Loans – by Lingling Wei for The Wall Street Journal
- Treasury Eases Tax Rules for Commercial Real Estate by Ryan J. Donmoyer for Bloomberg
- Real Estate Roundtable Welcomes IRS Action Allowing CMBS Loan Modifications press release