Regarding unforgiving field of REIT conformity, even good sliver off doubt can have a serious chilling effect

1. The fresh new borrower try sometimes somebody in a partnership and/or sole person in a disregarded entity; 19
2. The mortgage should be nonrecourse, safeguarded only by the partner’s interest in the partnership or perhaps the member’s interest in this new forgotten about organization;
3. The financial institution must have a primary top priority security interest in the bound control notice;
4. Up on default and you may foreclosures, the lender have a tendency to replace the debtor once the a partner from the relationship otherwise as sole person in new overlooked entity, if in case a collaboration, additional lovers must have offered to maybe not unreasonably contradict brand new entry of the lender due to the fact somebody;
5. If the mortgage commitment becomes binding on the lender, the relationship otherwise overlooked organization need hold houses, and in case the genuine home is after that offered otherwise moved in the whole or perhaps in area, the borrowed funds becomes owed through to like revenue or transfer;
6. The value of the genuine assets need certainly to stay at the very least 85% of one’s property value the assets of your union otherwise forgotten entity;
7. The new fair market price of real property since the fresh loan relationship day (due to the fact quicker of the amount of any elder liens or debts) should be no less than equivalent to the loan amount; and you may
8. Notice towards the financing have to lies solely regarding settlement on the have fun with or forbearance of money, additionally the attract count will most likely not rely entirely or in part towards income otherwise profits of every individual, except the attention amount are a predetermined percentage of the brand new borrower’s receipts otherwise transformation.

The Cash Processes was this new IRS’s history significant declaration out of REITs just loans in Bridgewater like the mezzanine loan providers, and therefore, it has been the main supply of advice on this topic to possess REITs and their legal services since.

Advised Status towards IRS’s Advice

The latest Revenue Procedure offers a safe harbor, it doesn’t establish the personal conditions to own computing compliance having new REIT Standards. This basically means, a REIT mezzanine bank might adhere to this new REIT Conditions actually whether or not it does not match the Revenue Procedure’s conditions. 20 The purpose of the fresh Money Procedure is to try to give confidence-it is now the sole method for present beyond doubt one to a beneficial mezzanine loan complies toward REIT Standards. 21 Due to the fact discussed over, failure to help you comply with the brand new REIT Standards can also be release a good menagerie out of gruesome effects, as well as loss of REIT standing altogether and you may imposition of a corporate-peak taxation. 22 As such, of several REITs are simply just unwilling to make the tiniest play toward their REIT conformity. 23 In the event the REITs will probably perform their part to meet up with the newest expanding significance of mezzanine money, you will need to possess a reliable, workable safer harbor.

Both most commonly quoted problems are: (1) the necessity the loan end up being nonrecourse, and you may (2) the requirement your loan immediately accelerate if even part of the root a house is sold otherwise transported

REITs were productive within the mezzanine fund inside the decades once the new Internal revenue service awarded the latest Revenue Processes. 24 The 2009 season, CareTrust REIT participated in brand new origination of over $52 mil inside mezzanine funds secure from the portfolios regarding competent nursing and you will helped lifestyle characteristics. 25 Last year, 3650 REIT originated a beneficial $103 mil mezzanine loan concerning the the new recapitalization off an excellent collection out-of multifamily characteristics. 26

Yet, however some REITs has joined this new mezzanine financing area, of numerous provides eliminated they on account of certain difficult regions of the fresh new Funds Techniques. A number of the Revenue Procedure’s conditions argument having important mezzanine credit techniques. 27 A few of the challenging lending means, including recourse arrangements, are designed to mitigate the brand new increased likelihood of losings doing work in mezzanine lending. Therefore, REIT mezzanine lenders already have to select from heightened likelihood of dropping its REIT reputation or increased threat of dropping the capital. Confronted with these types of unpalatable possibilities, of many REITs provides only avoided the mezzanine financing room entirely.