CMBS restructuring rules eased

New tax rules will make it easier for distressed real estate owners to restructure securitised loans not in imminent danger of default.

To date, owners of loans that had been rolled up into securitisation vehicles, such as investment trusts and real estate mortgage investment conduits (REMICs), couldn’t modify a loan until they were about to, or had, defaulted without triggering tax penalties.

Those rules made it difficult for borrowers current on their payments to hold restructuring talks with special servicers.

However, the US government has issued guidance that will allow loan servicers to modify loans where it “reasonably believes there is a significant risk of default … upon maturity of the loan or at an earlier date”, without triggering tax penalties.

The US lobby group, the Real Estate Roundtable, welcomed the move – but it was criticised by some as reinforcing the industry’s attitude of “extend and pretend”.

Deloitte’s distressed debt leader Tino Korologos said the rules didn’t deal with the lack of credit in the marketplace and failed to address the fact current property valuations couldn’t support the face value of loans. “It helps when it’s a liquidity question, not a valuation and cash flow question.”

Roundtable chief executive Jeffrey DeBoer said though the move was needed to prevent a massive wave of commercial real estate debt defaults. “Borrowers need to be able to talk with their loan servicers about restructurings in a timely manner, before the point of default. The [Internal Revenue Service] has taken a very positive step toward easing today's crushing liquidity crisis in commercial real estate.”

Securitised “conduit” debt accounted for more than 60 percent of the commercial real estate mortgage market during the first half of 2007, according to the Roundtable, which predicted defaults and late payments on securitised loans could surpass 7 percent by the end of the year.