IRS Guidance on Modifications of Securitized Commercial Mortgage Loans Provides New Flexibility and Also Imposes New Requirements
September 18, 2009
On September 15, 2009, the Internal Revenue Service (IRS) released a package of official guidance on modifications of securitized commercial mortgage loans, providing both increased flexibility and new restrictions on the ability to modify such loans without adverse tax consequences. The package of guidance included:
Revenue Procedure 2009-45 (the Revenue Procedure) providing increased flexibility to lenders and servicers of commercial mortgage loans securitized by real estate mortgage investment conduits (REMICs) or investment trusts to modify such loans without jeopardizing the tax status of the securitization vehicle or the tax treatment of such loans. The Revenue Procedure applies to modifications effected on or after January 1, 2008.
Treasury Regulations (Final Regulations) expanding the list of permissible modifications to loans securitized by REMICs to include changes in (i) collateral, guarantees, and credit enhancement of the loan, and (ii) the recourse nature of the loan, provided that the modified loan continues to be principally secured by an interest in real property. The Final Regulations also impose a new requirement to retest the collateral value of a loan after modification to determine whether it is principally secured by an interest in real property at such time, although such retesting may utilize a new alternative test for determining value. The Final Regulations are effective beginning September 16, 2009.
Notice 2009-79 requesting comments on whether the new guidance in the Final Regulations for modifications of mortgage loans held by REMICs should also be extended to mortgage loans held by investment trusts.