CREFW-Winter2016

A publication of

Winter issue 2016 sponsored by

CRE Finance World Winter 2016

release, but there was a concern that the REMIC would be put

in a “damned if you do, damned if you don’t” situation. The latter

concern would arise where the borrower had an unqualified right

under the loan documents to obtain the REMIC’s release of its

lien on an outparcel, but permitting the release would potentially

disqualify the REMIC if the remaining real property collateral would

not support the “principally secured” (80% value-to-loan) test.

The IRS, on August 17, 2010, did a limited about-face with respect

to hardwired loan provisions when it released Rev. Proc. 2010-30,

which included a new exception for “grandfathered transactions.”

This exception applies only to release provisions in loan documents

executed no later than December 6, 2010. If those provisions are

hardwired (i.e., the release is automatic, provided the borrower

meets specified conditions), the

release of a REMIC’s lien from an

outparcel will not disqualify the

related loan and the release can be

completed without concern that the

REMIC that holds the borrower’s loan

will be disqualified. The “grandfathered

transaction” exception applies whether

or not the “principally secured” test

will be met following the release. As

we get farther from December 6, 2010, however, the exception for

“grandfathered transactions” will be less frequently available as the

number of loans remaining outstanding that predate December 6,

2010 will dwindle over time.

Since releases pursuant to loan documents executed after December

6, 2010 cannot qualify as grandfathered transactions, is there

any reason for a borrower to request that release provisions be

included in new loan documents? Although hardwired release

provisions will not override the requirement in the current REMIC

regulations that the borrower’s loan continue to satisfy the “principally

secured” (80% value-to-loan) test after the release, some borrowers

nevertheless take comfort in including these release provisions

that outline the necessary conditions for the borrower to obtain the

REMIC’s release of its lien on the related outparcel in their loan

documents. By doing so the borrower establishes the parameters

by which the servicer will review and approve the borrower’s

request for a real property collateral release, even though the

servicer must still make the 80% value-to-loan analysis under the

“principally secured” test. Because the hardwired conditions will no

longer override the general REMIC requirement, however, all loan

documents executed after late 2009 that contain a real property

collateral release provision should include a “REMIC savings”

condition, which states that the release will not be permitted unless

the parties verify that the loan continues to satisfy the principally

secured (80% value-to-loan) test following the release.

Misconception #2. “The outparcel was given no value in the

origination appraisal, so releasing it won’t affect the ‘principally

secured’ test.”

As noted above, the relevant REMIC inquiry when

reviewing a borrower’s request for an outparcel release is whether

the loan remains “principally secured” by an interest in real property

following the release, not whether the borrower’s loan documents

contain conditions that permit the release. Nevertheless, when

a borrower has gone to the trouble of including the conditions

necessary for a future collateral release in its loan documents, it is

not uncommon for the originating lender

to exclude the release parcel’s value

from the origination appraisal. After all,

that to-be-released outparcel may not

be around for long, so it is prudent from

a credit standpoint to value the release

parcel at $0 in determining how much

collateral the borrower is pledging at

the time the loan is originated.

But how does this affect the REMIC tax analysis when the parcel

is released? In short, it does not affect REMIC tax analysis at

all. Borrowers may be tempted in these situations to suggest

that there has not been a true release of real property collateral

because the release parcel was valued at $0 at origination. They

should resist that temptation. In all but the rarest of cases, the

outparcel does have value. As evidence of that, the borrower may

be required to pay a pre-established release price. In other cases,

the borrower may be planning to sell the outparcel for a hefty sum.

No value in the release parcel? Hardly.

The only possible benefit of setting the release parcel’s value at

$0 in the origination appraisal is that, if and when the borrower

attempts to secure the REMIC’s release of its lien on the outparcel,

there may be a higher likelihood that there will be ample value

in the remaining real property collateral following the release

because there was ample value in that real property collateral at

the time the loan was originated even attributing a $0 value the

release parcel at origination. This would make it easier to satisfy

the “principally secured” test at the time the borrower requests

that the outparcel be released from the REMIC’s lien.

REMIC Issues in CMBS 2.0

“Servicers and borrowers mistakenly

assume that there are no REMIC

issues if the borrower’s right to obtain

the REMIC’s release of its lien on an

outparcel at the collateral property is...

automatic and not dependent on the

consent or approval of the REMIC.”