Recognizing that the widespread decline in real estate values could adversely affect the ability of a real estate investment trust (“REIT”) to maintain its status for federal income tax purposes, on January 5, 2011 the Internal Revenue Service issued a new safe harbor for REITs with respect to certain mortgage loan modifications. The new guidance is contained in Revenue Procedure 2011 16 (the “Rev. Proc.”) which gives relief in a situation where declines in the value of real estate securing a loan might have otherwise created non-qualifying income or assets for REIT qualification purposes.

In order to qualify as a REIT, an entity must meet two annual income tests (among other requirements). First, at least 75% of the entity’s gross income must consist of real estate related income, including, in particular, rents from real property and mortgage interest (the “75% income test”). Second, at least 95% of the entity’s gross income must consist of items that meet the 75% income test plus other passive income, including interest and dividends (the “95% income test”).