IRS Extends COVID-19 Forbearance Relief for REMICs and Grantor Trusts

On January 14, 2021, the IRS issued Revenue Procedure 2021-12, which extends the coronavirus-related relief granted to certain investment vehicles under two earlier revenue procedures from December 31, 2020 to September 30, 2021.

Revenue Procedure 2020-26

Revenue Procedure 2020-26 (discussed here) permits loans that are subject to certain forbearances and related modifications as a result of the COVID-19 pandemic to be contributed to, and held in, real estate mortgage investment conduits (REMICs) and grantor trusts without jeopardizing these vehicles’ U.S. tax status.

More specifically, under Revenue Procedure 2020-26:

  • LTV test. A mortgage loan’s LTV does not have to be retested as a result of a qualified forbearance to determine whether the loan is REMIC-eligible;
  • Deemed reissuance. A qualified forbearance of a loan that is held by a REMIC or grantor trust does not jeopardize the tax status of the REMIC or grantor trust;
  • Foreclosure-restriction. A qualified forbearance before a loan is contributed to a REMIC does not restrict the REMIC from later foreclosing on the loan; and
  • Unconditional entitlement to payments. Interest shortfalls and special servicing fees incurred as a result of a qualified forbearance do not cause a REMIC’s regular interests to fail to qualify as such.

For these purposes, qualified forbearances are:

  • Forbearances under certain federally backed residential and multifamily mortgage loans that are granted under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act); and
  • Similar forbearances of up to six months that are provided to borrowers experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency and are requested or agreed to between March 27, 2020, and December 31, 2020 (now extended to September 30, 2021),

in each case together with any related modifications.

Revenue Procedure 2020-34

Revenue Procedure 2020-34 (discussed here) allows certain investment trusts to enter into coronavirus-related modifications without manifesting a “power to vary” and possibly jeopardizing their existing tax treatment.

More specifically, under Revenue Procedure 2020-34:

  • Mortgage Loan Modifications. A trust may agree with its lenders to a qualified forbearance on any mortgage loan that secures the trust’s real property. For these purposes, qualified forbearances are:
    • Forbearances under certain federally backed residential and multifamily mortgage loans that are granted under the CARES Act; and
    • Similar forbearances of up to six months that are provided to trusts experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency and are requested or agreed to between March 27, 2020 and December 31, 2020 (now extended to September 30, 2021).
  • Lease Modifications. A trust may modify leases entered into on or before March 13, 2020 to (1) coordinate the lease cash flows with the cash flows that result from a qualified forbearance or (2) defer or waive one or more tenants' rental payments for any period between March 27, 2020 and December 31, 2020 (now extended to September 30, 2021), so long as the modifications were requested and agreed to during that time period and the tenants are experiencing financial hardship due to the COVID-19 emergency.
  • Additional cash contributions. A trust may accept cash contributions that are made between March 27, 2020 and December 31, 2020 (now extended to September 30, 2021) as a result of the trust experiencing financial hardship due to the COVID-19 emergency, provided that any such contribution is needed to increase permitted trust reserves, to maintain trust property, to fulfill obligations under mortgage loans, or to fulfill obligations under real property leases. If the contribution is made by new interest holders in exchange for new interests in the trust, or is a non-pro rata contribution made by one or more existing interest holders, it will be treated as a taxable sale by each non-contributing (or lesser contributing) trust interest holder of his or her proportionate interest in the trust's assets.
 

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