This edition of the REO Advisor examines the parameters of the REO holding or “grace period" and explores the limits of reconstruction projects at REO properties.
 

Example 1. A REMIC foreclosed on and acquired title to an office building. The foreclosure took place in December, 2015. Immediately after the foreclosure, the borrower filed suit and challenged the validity of the foreclosure. The litigation continued through November, 2017, at which time the special servicer obtained a court decision validating the foreclosure and REMIC’s title to the office building. During the December, 2015 – November, 2017 period, the special servicer was unable to market and sell the office building as no title insurance company would issue an owner’s policy to prospective purchasers without reservation clauses in connection with the pending litigation. Because the REMIC’s title to the REO property was not judicially confirmed until November, 2017, does the special servicer use November, 2017, as the start of the 3-year grace period during which the REMIC can hold REO property rather than the December 2015 foreclosure?

Answer: No. Regardless of the borrower litigation and its adverse effect on the marketability of the REO property, the IRS has taken a hardline approach to these issues. In this case, we believe that December, 2015, would be considered as the start of the 3-year grace period during which the REMIC may hold the REO property... More...

Example 2. On behalf of a REMIC, the special servicer recently foreclosed on a warehouse in Florida. Shortly after the foreclosure, the REO property suffered significant damage caused by a hurricane. The roof of the warehouse was blown off which then caused the collapse of the entire West side wall of the building. The special servicer is assessing the scope of the rehabilitation work and, also, a possible increase in the usable square footage of the warehouse (given a recent increase in demand for warehouse space) by changing the footprint of the building as part of the effort to rebuild the collapsed West side wall. Can the special servicer engage in this construction project?

Answer: It will be possible for the REMIC to repair the warehouse to its original configuration but any proposed expansion of the building will not be permitted. A REMIC will be subject to a 100% prohibited transaction tax on any income which it generates from construction activities at the REO property... More...