BOMA International Position
BOMA supports amending the Real Estate Mortgage Investment Conduit (REMIC) rules to make securitization more attractive to commercial borrowers by allowing common modifications to property once the loan has been securitized.
Background
The REMIC is a tax vehicle created by Congress in 1986 to support investment in real estate by making it simpler to issue real estate backed securities. It is the primary vehicle through which loans are grouped into securities. Under Section 1001 of the Internal Revenue Code, the pool of loans comprising a REMIC must be static. If a loan is deemed exchanged for a new loan the REMIC will lose its tax-exempt status, triggering adverse tax consequences for investors.
However, the rules that govern REMICs place limitations on a commercial loan once it is securitized. For example, a property owner would have to obtain a tax opinion before renovating space to accommodate a new tenant. If the tax opinion found that more than ten percent of the loan's collateral would be changed, the renovation could not go forward. Thus, a property owner is constrained in their ability to reposition their property, or modify the property's use, to better meet the demands of a changing marketplace and, in turn, enhance the property's value. Under the proposed changes, this type of modification, as well as many others (e.g., selling an adjacent parcel, demolishing part of a building) would be able to go forward provided that the terms of the loan (e.g., maturation date, principal) do not change. As a result of these changes, property owners would have greater flexibility in enhancing the value of their property and more commercial loans will likely be securitized which will, in turn, increase the flow of capital to commercial development, something that is desperately needed during timeline of time of limited liquidity. This change will benefit those who own, broker leases, and broker sales of commercial property.
In the past, Congress has introduced legislation to modernize the REMIC rules. Current efforts are underway in the Department of Treasury and Internal Revenue Service to amend the rules or relax them temporarily, during the current economic downturn.