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Abstract: 

On September 15, 2009, the Internal Revenue Service issued three pieces of guidance on commercial mortgage modifications. Revenue Procedure 2009 - 45 gives real estate mortgage investment conduits (REMICs) and fixed investment trusts additional discretion to modify certain commercial mortgage loans without adversely affecting their tax treatment. Additionally, the IRS and the Treasury Department issued final regulations clarifying that certain modifications of a type often made to commercial mortgages are not impermissible within a REMIC. The final regulations do not apply to fixed investment trusts but, in Notice 2009-79, the IRS asked for comments on the extent to which fixed investment trusts are used to securitize commercial mortgage loans and on what guidance, if any, is needed on modifi cations of commercial mortgages that are held by fixed investment trusts. Whether the revenue procedure and the regulations will have a significant effect on the market for commercial mortgage-backed securities (CMBSs) remains uncertain. The rules governing the taxation of CMBSs have been alluded to as a factor that inhibited workouts of commercial loans in the past, and alleviating this concern may encourage flexibility. However, the recent guidance released by the IRS does not alter the degree of flexibility that servicers have to modify commercial mortgages under the contractual provisions governing the securitization transaction.

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Affiliations:  1: Sullivan & Cromwell LLP.