On September 15, the Internal Revenue Service published Revenue Procedure 2009-45 providing that a servicer may agree to a substantial modification of any commercial mortgage loan as long as the servicer reasonably believes that there is a significant risk of default of the pre-modification loan upon maturity of the loan or at an earlier date, without thereby causing the real estate mortgage investment conduit (REMIC) or grantor trust status of a securitization vehicle to be challenged. This reasonable belief must be based on a diligent contemporaneous determination of that risk, which may take into account credible written factual representations made by the issuer of the loan if the holder or servicer neither knows nor has reason to know that such representations are false. In a determination of the significance of the risk of a default, one relevant factor is how far in the future the possible default may be, but there is no maximum period. For example, the foreseen default might be as much as one year or more in the future. Most significantly (and contrary to the IRS’s understanding of the prior views of many industry participants), a servicer may reasonably believe that there is a significant risk of default even if the loan is currently performing and default is not imminent. The servicer must reasonably believe that the modified loan presents a substantially reduced risk of default, as compared with the pre-modification loan.

The revenue procedure applies to loan modifications of commercial loans effected on or after January 1, 2008.

The IRS also finalized long-anticipated regulations easing the restrictions on modifications of performing commercial mortgage loans held in a REMIC. We will further describe these and related developments in a special Client Advisory.

Click here to read Revenue Procedure 2009-45.