New Tax Rule Lifts Modification Disincentive for CMBS
New tax rules that take effect Wednesday may increase the occurrence of modifications within commercial mortgage-backed securities (CMBS). Previous tax rules imposed penalties for changes made to commercial mortgage pools after their inclusion in a securitization vehicle, posing a disincentive to modifying commercial real estate loans within CMBS. The rules issued by the International Revenue Service (IRS) and US Treasury Department permit in certain cases the modification of commercial mortgages within real estate mortgage investment conduits (REMICs) without tax penalty. The changed rules will ease the process of modifying at-risk commercial mortgages, according to Real Estate Econometrics, an analytics firm that tracks data from banks and Federal Deposit Insurance Corp.-insured institutions. "While limited in its scope to securitizations, this change removes a significant disincentive for the revision of commercial mortgages otherwise at risk of default," Real Estate Econometrics said in a statement. "By reducing the cost of managing distress in mortgage portfolios, the adjustment has the potential to ameliorate outcomes for legacy CMBS, in particular." Under the new rules, borrowers may be able to proactively discuss possible modifications before default, whereas under the old rules they were unable to pursue options well ahead of default, according to the Real Estate Roundtable, an organization that acts as a forum for the discussion of policy effects on US real estate and the economy. In July, the Roundtable president Jeffrey DeBoer estimated $300bn to $500bn of commercial real estate loans will come due this year, followed by an average $400bn in maturing loans each year for the next decade. The pending maturity dates will likely pressure the commercial mortgage market further and increase the likelihood of default. "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," DeBoer said 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." Write to Diana Golobay.