The IRS has issued a new tax rule that will allow commercial real estate borrowers to proactively discuss possible modifications to securitized loans that are at risk of default without triggering tax penalties.

Revenue Procedure 2009-45 describes the conditions under which modifications to certain mortgage loans will not cause the IRS to challenge the tax status of certain securitization vehicles that hold the loans or to assert that those modifications give rise to prohibited transactions.

Commercial real estate interests, including the Real Estate Roundtable, had lobbied heavily for the changes. Until now, the roundtable noted, administrative tax rules applicable to real estate mortgage investment conduits and investment trusts imposed severe penalties for changes made to commercial mortgage pools or investment interests after the start-up date of the securitization vehicle. As a result, borrowers were unable to begin discussions with their loan servicers until they had already defaulted or were within weeks or months of defaulting.

“Amidst a massive wave of maturing commercial real estate debt — and still virtually no credit available for refinancing — borrowers need to be able to talk with their loan servicers about restructurings in a timely manner, before the point of default,” said roundtable president and CEO Jeffrey D. DeBoer in a statement. “By easing the tax penalties on changes to securitized ‘conduit debt’ — i.e., loans held within a REMIC — IRS has taken a very positive step toward easing today’s crushing liquidity crisis in commercial real estate.”

The roundtable estimates that $300 billion to $500 billion in commercial real estate loans are coming due this year, to be followed by, on average, $400 billion in maturing loans each year for the next decade.

In a July 29 letter to Treasury Secretary Timothy Geithner, Rep. Carolyn Maloney, D-N.Y., chair of Congrss’s Joint Economic Committee, wrote that property owners who lack the certainty that they will not be forced into default on commercial mortgage loans when they mature “will not be willing to make further capital investments in their property, which has negative implications for both asset values and those parts of our economy that benefit from such investments.”

Securitized "conduit" debt accounted for over 60 percent of the commercial real estate mortgage market during the first half of 2007, before the subprime mortgage market meltdown and its spill-over effect on the commercial mortgage-backed securities market, according to the roundtable. Defaults and late payments on securitized loans could surpass 7 percent by the end of this year.

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