Real Estate Roundtable Welcomes IRS Action Allowing CMBS Loan Modifications
WASHINGTON, Sept. 15 /PRNewswire-USNewswire/ -- The Real Estate Roundtable today welcomed a new Internal Revenue Service (IRS) tax rule (Revenue Procedure 2009-45) 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.
Until now, administrative tax rules applicable to Real Estate Mortgage Investment Conduits (REMICs) and investment trusts imposed severe penalties for changes made to commercial mortgage pools or investment interests after the startup date of the securitization vehicle. As a result, borrowers were unable to even 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. 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," said Roundtable President and CEO Jeffrey D. DeBoer.
"Reducing loan defaults and associated property devaluations also will help prevent further shocks to the fragile economic recovery, protect investors large and small, and protect communities around the country that rely heavily on commercial property tax assessments for their operating revenue," he added. "Given real estate's interconnectedness with all facets of U.S. economic life -- including its capacity to drive job growth -- today's announcement should benefit borrowers, lenders, servicers, investors, construction workers and others."
In July 9 testimony before Congress' Joint Economic Committee (JEC), DeBoer said an estimated $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, JEC Chair Carolyn Maloney (D-NY) wrote that property owners who lack the certainty 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."
The Roundtable and its real estate trade association partners have been pressing Treasury for the past year to temporarily ease the "very restrictive tax rules that apply to modifications of commercial real estate loans which have been packaged into [commercial mortgage-backed securities, or CMBS]." In a July 24 letter to Geithner, the organizations said this step would allow borrowers to "proactively discuss possible loan modifications with those who service their loans in order to deal with these issues prior to a maturity default, while there is still time to deal with them."
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 CMBS market). Defaults and late payments on securitized loans could surpass 7 percent by the end of this year.
IRS Revenue Procedure 2009-45, which takes effect September 16, is on par with actions already taken by Congress, Treasury and the IRS to eliminate or mitigate certain tax consequences relating to residential mortgage loan restructurings.
