Treasury Reworking Tax Rules to Help Dampen Commercial Real Estate Fallout

The Treasury today introduced new tax rules to help services, borrowers, and lenders to modify loans without having to worry about triggering tax penalties.

Until now, tax rules have made it difficult for borrowers who are current on their payments to hold restructuring talks with the servicers of these bonds. Developers and investors complain that only those who are delinquent can talk to the servicers. Indeed, many property owners — notably mall giant General Growth Properties Inc., now in bankruptcy protection — have cited this lack of flexibility as one of the reasons for having to default on debt and give up properties.

The new guidance from the Treasury makes it clear discussions involving lowering the interest rate or stretching out the loan term “may occur at any time” without triggering tax consequences. In addition, the guidance allows servicers to modify loans regardless of when they mature. The servicer only has to believe there is “a significant risk of default” even if the loan is performing, the guidance states.

The Treasury (IRS) is moving to help stave off a massive amount of write-offs from hitting the banks, who already have had to have mark-to-market rules modified to help them through the crisis. Still though, new rules don’t solve the problem of who they are designed to help in [CMBS] deals where there are layers (and layers) of debt. The WSJ article linked to below goes into some detail about the servicer’s role in all of this and the juggling that needs to be done. Still though, this doesn’t seem to solve the issue of the special servicer’s concern about litigation and so on.

[via WSJ and Bloomberg]

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