IRS Guidelines Clears the Way for CMBS Modifications: K&L Gates
The Internal Revenue Service's release of two new pieces of guidance to address the types of modifications on commercial mortgage loans held by real estate mortgage investment conduits (REMIC) removes disincentive for the modifications, according to a report from the law firm K&L Gates. The modifications would not threaten the REMIC status or introduce tax consequences, according to the report authored by Thomas Lyden, David Jones and Anthony Barwick. The final regulations now permit a REMIC to change collateral, guarantees and the credit enhancement for a mortgage loan. The IRS also described situations where the tax status of the REMIC would not be challenged due to the modification of a commercial mortgage loan that is performing but poses a significant risk in the future, according to the report. Such a modification must release, substitute, add or alter a substantial amount of the collateral, according to the report. “These changes remove a significant disincentive for the revision of commercial mortgages otherwise performing but at significant risk of default upon maturity,” according to the report. Between now and 2012, $150bn of loans held by REMICs and other commercial mortgage-backed securities issuers will come due, according to the report. Year to date, 528 loans with a total value of $4.7bn never refinanced at their maturities, even though commercial real estate secured nearly 75% of them to generate sufficient cash to service the debt. “Because financing remains scarce and commercial property values continue to decline, evidence indicates that ‘maturity defaults’ for commercial properties with little or no amortization during the loan term will continue to be a widespread problem, further constraining the capital markets and depressing property values,” according to the report. The authors concluded that the two pieces of guidance offer some help with the refinancing crisis that looms over the commercial real estate sector. According to the CMBS and commercial mortgage informtion provider Trepp, CMBS spreads, or the the difference in yield between a bond and its benchmark, tightened by 15 to 25 bps after the release of the guidelines. But HousingWire reported that another research firm did not expect the new guidelines to reach down deep enough to rescue underwater borrowers. Write to Jon Prior.