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New Rule Allows CMBS Modification

APARTMENT FINANCE TODAY • November/December 2009

BY Jerry Ascierto

THE ISSUE OF CMBS MATURITIES has loomed like a dark cloud throughout the recession. But a new rule by the Internal Revenue Service could have a big impact on stemming the tide of CMBS defaults.

Revenue Procedure-2009-45 allows servicers to modify and restructure securitized loans before they slip into default, in much the same way that balance-sheet lenders have done throughout the credit crisis.

In the past, modifications of current CMBS loans triggered severe tax penalties, and the loan could only be modified once it went into default and was transferred to a special servicer.

While CMBS borrowers will benefit from the new regulation, some in the industry are concerned about unintended consequences. Investors may be less inclined to buy upcoming CMBS issuances if the cash flows and duration of the loans underlying the bonds could be modified at any time.

There must be a compelling reason for the servicer to modify the loan—they are under a fiduciary obligation to act in the best interests of the bondholders. So the most aggressively underwritten, nonperforming loans won’t find refuge under the new rule. But borrowers with low-leverage loans who can’t find refinancing capital can now pick up the phone and start negotiations. The change applies to all modifications made after Jan. 1, 2008.