New REIT Safe Harbor with Respect to Certain Modifications of Troubled Mortgage Loans

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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”).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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