Rp 2009-45

Exhibit 5:
Model Mediator’s Report
The parties below agreed to mediate their dispute and attended a mediation session on MONTH DAY, YEAR in an attempt to
settle the following issue(s):
ISSUE:
SETTLEMENT:

[ ] Yes
[ ] No
[ ] Partial

Proposed Adjustment Amount:

Amount Sustained:

ISSUE:
SETTLEMENT:

[ ] Yes
[ ] No
[ ] Partial

Proposed Adjustment Amount:

Amount Sustained:

Settlement documents will be prepared under established Appeals procedures.
DATED this

day of

/s/ Mediator
/s/ Party
/s/ Party

26 CFR 601.105: Examination of returns and claims
for refund, credit or abatement; determination of correct tax liability.
(Also: Part I, §§ 860D, 860F, 860G, 1001; 1.860G–2,
1.1001–3, 301.7701–2, 301.7701–3, 301.7701–4.)

Rev. Proc. 2009–45
SECTION 1. PURPOSE
This revenue procedure describes the
conditions under which modifications to
certain mortgage loans will not cause the
Internal Revenue Service (Service) to
challenge the tax status of certain securitization vehicles that hold the loans or to
assert that those modifications give rise to
prohibited transactions.
No inference should be drawn about
whether similar consequences would obtain if a transaction falls outside the limited
scope of this revenue procedure. Furthermore, there should be no inference that,
in the absence of this revenue procedure,
transactions within its scope would have
impaired the tax status of securitization ve-

October 5, 2009

hicles or would have given rise to prohibited transactions.
SECTION 2.
BACKGROUND—COMMERCIAL
MORTGAGE LOANS
.01 Under the terms of many commercial mortgage loans, all or a large portion
of the original stated principal is due at maturity. Typically, at the time of loan origination, both the borrower and the lender
expected the borrower to obtain funds to
satisfy the large payment at maturity by obtaining a new mortgage loan secured by the
same underlying interest in real property.
.02 The current situation in the credit
markets is affecting the availability of financing and refinancing for commercial
real estate. In particular, borrowers under
many of the commercial mortgage loans
that will mature in the next few years are
concerned that they will encounter great
difficulty in obtaining refinancing for these
loans. Because they had always anticipated using the proceeds from refinancing
to satisfy the principal balance due at maturity, these borrowers are often at risk of
defaulting when their loans mature. This

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may be true even for loans in which the underlying commercial real estate is providing more than enough cash flow to satisfy
debt service before maturity.
.03 Many commercial mortgage loans
are held in securitization vehicles such as
investment trusts and real estate mortgage
investment conduits (REMICS). Typically,
these pools of loans are administered by
servicers that handle the day-to-day operations of the mortgage loan pools and by
special servicers that handle the modification and restructuring of defaulted loans, as
well as foreclosure or similar conversion
of defaulted mortgage loan property.
.04 Many loan pool administrators have
developed and implemented procedures
for monitoring both the status of the commercial properties securing the mortgage
loans and the likelihood of borrowers being able to refinance their mortgage loans
or sell the mortgaged property as the loans
mature. The personnel who implement
these procedures are often experienced in
negotiating with borrowers, restructuring
troubled commercial loans, and foreclosing on commercial properties. It may be
possible, therefore, to foresee impending

2009–40 I.R.B.

difficulties for a mortgage loan well in
advance of any actual payment default.
.05 Many industry participants have
concluded that the monitoring procedures
that have been adopted and the level of
experience of those implementing the procedures make it possible to assess with
substantial accuracy whether particular
commercial mortgage loans present an
unacceptably high risk of eventual foreclosure. It may be possible to foresee this
risk of foreclosure even when no payment
default has yet occurred and when the
event of default may not occur until the
maturity of the loan.
.06 Many industry participants have
also concluded that it is possible to predict with a reasonable degree of accuracy
whether proposed modifications will allow mortgage loans to continue to perform
(and so avoid the necessity of property
foreclosure). Modifications that may be
considered include interest rate changes,
principal forgiveness, extensions of maturity, and alterations in the timing of
changes to an interest rate or to a principal
amortization schedule. In many cases,
modifications that include extensions of
the maturity and, thus, postpone the need
for refinancing, may reduce the risk of
foreclosure.
.07 Often the complexity of the mortgage loans themselves and the consequent
complexity of modifications to them necessitate a substantial period prior to any
expected payment or maturity default for
the negotiation of any such modifications.
SECTION 3.
BACKGROUND—REMICS
.01 REMICs are widely used securitization vehicles for mortgages. REMICs are
governed by sections 860A through 860G
of the Internal Revenue Code.
.02 For an entity to qualify as a REMIC,
all of the interests in the entity must consist
of one or more classes of regular interests
and a single class of residual interests, see
section 860D(a), and those interests must
be issued on the startup day, within the
meaning of § 1.860G–2(k) of the Income
Tax Regulations.
.03 A regular interest is one that is designated as a regular interest and whose
terms are fixed on the startup day. Section
860G(a)(1). In addition, a regular interest
must (1) unconditionally entitle the holder

2009–40 I.R.B.

to receive a specified principal amount (or
other similar amount), and (2) provide that
interest payments, if any, at or before maturity are based on a fixed rate (or to the
extent provided in regulations, at a variable
rate).
.04 An interest issued after the startup
day does not qualify as a REMIC regular
interest.
.05 Under section 860D(a)(4), an entity
qualifies as a REMIC only if, among other
things, as of the close of the third month
beginning after the startup day and at all
times thereafter, substantially all of its assets consist of qualified mortgages and permitted investments. This asset test is satisfied if the entity owns no more than a
de minimis amount of other assets. See
§ 1.860D–1(b)(3)(i). As a safe harbor, the
amount of assets other than qualified mortgages and permitted investments is de minimis if the aggregate of the adjusted bases
of those assets is less than one percent of
the aggregate of the adjusted bases of all of
the entity’s assets. § 1.860D–1(b)(3)(ii).
.06 With limited exceptions, a mortgage loan is not a qualified mortgage
unless it is transferred to the REMIC on
the startup day in exchange for regular
or residual interests in the REMIC. See
section 860G(a)(3)(A)(i).
.07 The legislative history of the
REMIC provisions indicates that Congress
intended the provisions to apply only to
an entity that holds a substantially fixed
pool of real estate mortgages and related
assets and that “has no powers to vary
the composition of its mortgage assets.”
S. Rep. No. 99–313, 99th Cong., 2d Sess.
791–92, 1986–3 (Vol. 3) C.B. 791–92.
.08 Section 1.1001–3(c)(1)(i) defines a
“modification” of a debt instrument as any
alteration, including any deletion or addition, in whole or in part, of a legal right or
obligation of the issuer or holder of a debt
instrument, whether the alteration is evidenced by an express agreement (oral or
written), conduct of the parties, or otherwise. Section 1.1001–3(e) governs which
modifications of debt instruments are “significant.” Under § 1.1001–3(b), for most
federal income tax purposes, a significant
modification produces a deemed exchange
of the original debt instrument for a new
debt instrument.
.09 Under § 1.860G–2(b), related rules
apply to determine REMIC qualification. Except as specifically provided in

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§ 1.860G–2(b)(3), if there is a significant
modification of an obligation that is held
by a REMIC, then the modified obligation
is treated as one that was newly issued in
exchange for the unmodified obligation
that it replaced. See § 1.860G–2(b)(1).
For this purpose, the rules in § 1.1001–3(e)
determine whether a modification is “significant.” See § 1.860G–2(b)(2). Thus,
even if an entity initially qualifies as a
REMIC, one or more significant modifications of loans held by the entity may
terminate the qualification if the modifications cause less than substantially all of the
entity’s assets to be qualified mortgages.
.10 Certain loan modifications, however, are not significant for purposes of
§ 1.860G–2(b)(1), even if the modifications are significant under the rules
in § 1.1001–3.
In particular, under
§ 1.860G–2(b)(3)(i), if a change in the
terms of an obligation is “occasioned by
default or a reasonably foreseeable default,” the change is not a significant modification for purposes of § 1.860G–2(b)(1),
regardless of the modification’s status under § 1.1001–3.
.11 Discussions between a holder or servicer and a borrower concerning a possible
modification of a loan may occur at any
time and need not begin only after the loan
is in default or there is a reasonably foreseeable default.
.12 The Service understands that many
industry participants believe that a loan
modification necessarily fails to be “occasioned by default or a reasonably foreseeable default” unless the loan is not performing or default is imminent.
.13 Section 860F(a)(1) imposes a tax on
REMICs equal to 100 percent of the net
income derived from “prohibited transactions.” The disposition of a qualified mortgage is a prohibited transaction unless the
“disposition [is] pursuant to—(i) the substitution of a qualified replacement mortgage for a qualified mortgage . . . , (ii) a
disposition incident to the foreclosure, default, or imminent default of the mortgage,
(iii) the bankruptcy or insolvency of the
REMIC, or (iv) a qualified liquidation.”
Section 860F(a)(2)(A).
.14 Under section 860C(b)(1), “The
taxable income of a REMIC shall be
determined under an accrual method of accounting . . . except that— . . . (C) there
shall not be taken into account any item of

October 5, 2009

income, gain, loss, or deduction allocable
to a prohibited transaction, . . . .”
SECTION 4.
BACKGROUND—TRUSTS
.01 Section 301.7701–2(a) of the Procedure and Administration Regulations
defines a “business entity” as any entity
recognized for federal tax purposes (including an entity with a single owner that
may be disregarded as an entity separate
from its owner under § 301.7701–3) that
is not properly classified as a trust under
§ 301.7701–4 or otherwise subject to special treatment under the Code.
.02 Section 301.7701–4(a) provides
that an arrangement is treated as a trust if
the purpose of the arrangement is to vest
in trustees responsibility for the protection
and conservation of property for beneficiaries who cannot share in the discharge
of this responsibility and, therefore, are
not associates in a joint enterprise for the
conduct of business for profit.
.03 Section 301.7701–4(c) provides
that an “investment” trust is not classified
as a trust if there is a power under the trust
agreement to vary the investment of the
certificate holders.
SECTION 5. SCOPE
This revenue procedure applies to a
modification (including an actual exchange to which § 1.1001–3 applies) of
a mortgage loan (the “pre-modification
loan”) that is held by a REMIC, or by an
investment trust, if all of the following
conditions are satisfied:
.01 The pre-modification loan is not secured by a residence that contains fewer
than five dwelling units and that is the principal residence of the issuer of the loan.
.02 Either—(1) If a REMIC holds the
pre-modification loan, then as of the end
of the 3-month period beginning on the
startup day, no more than ten percent of
the stated principal of the total assets of the
REMIC was represented by loans fitting
the following description: At the time of
contribution to the REMIC, the payments
on the loan were then overdue by at least
30 days or a default on the loan was reasonably foreseeable; or
(2) If an investment trust holds the premodification loan, then as of all dates when
assets were contributed to the trust, no

October 5, 2009

more than ten percent of the stated principal of all the debt instruments then held
by the trust was represented by instruments
the payments on which were then overdue
by 30 days or more or for which default
was reasonably foreseeable.
.03 Based on all the facts and circumstances, the holder or servicer reasonably
believes that there is a significant risk of
default of the pre-modification loan upon
maturity of the loan or at an earlier date.
This reasonable belief must be based on a
diligent contemporaneous determination
of that risk, which may take into account
credible written factual representations
made by the issuer of the loan if the holder
or servicer neither knows nor has reason to
know that such representations are false.
In a determination of the significance of
the risk of a default, one relevant factor is how far in the future the possible
default may be. There is no maximum
period, however, after which default is
per se not foreseeable. For example, in
appropriate circumstances, a holder or
servicer may reasonably believe that there
is a significant risk of default even though
the foreseen default is more than one year
in the future. Similarly, although past
performance is another relevant factor
for assessing default risk, in appropriate
circumstances, a holder or servicer may
reasonably believe that there is a significant risk of default even if the loan is
performing.
.04 Based on all the facts and circumstances, the holder or servicer reasonably
believes that the modified loan presents
a substantially reduced risk of default, as
compared with the pre-modification loan.
SECTION 6. APPLICATION
If one or more modifications of premodification loans are within the scope of
Section 5 of this revenue procedure—
.01 The Service will not challenge a
securitization vehicle’s qualification as a
REMIC on the grounds that the modifications are not among the exceptions listed
in § 1.860G–2(b)(3);
.02 The Service will not contend that
the modifications are prohibited transactions under section 860F(a)(2) on the
grounds that the modifications result in
one or more dispositions of qualified mortgages and that the dispositions are not

473

among the exceptions listed in section
860F(a)(2)(A)(i)-(iv);
.03 The Service will not challenge a
securitization vehicle’s classification as a
trust under § 301.7701–4(c) on the grounds
that the modifications manifest a power to
vary the investment of the certificate holders; and
.04 The Service will not challenge a
securitization vehicle’s qualification as a
REMIC on the grounds that the modifications result in a deemed reissuance of the
REMIC regular interests.
SECTION 7. EXAMPLE
The following example illustrates the
application of this revenue procedure:
.01 Facts. As part of its business, S services mortgage loans that are held by R, a REMIC that is described in Section 5.02(1) of this revenue procedure.
Borrower B is the issuer of one of the mortgage loans
held by R. B’s mortgage loan is non-amortizing, and
thus the entire principal amount is due upon maturity. The real property securing B’s mortgage loan is
an office building. All of B’s required payments on
the mortgage loan have been timely, and the loan is
not scheduled to mature for another 12 months. B expects that in order to repay the loan when it matures,
B will have to refinance the maturing mortgage loan
into a newly issued mortgage loan. There are factors,
however, that indicate that refinancing options may
be unavailable to B at the time the mortgage loan matures. These factors include either or both of the following: current economic conditions in the relevant
credit markets, and the current market value of the
real property securing the loan. B provides a written
factual representation to S showing that B will probably not be able to repay or refinance the mortgage
loan at maturity. S neither knows, nor has reason to
know, that the representation is false.
Based on all the facts and circumstances and a
diligent contemporaneous determination, S reasonably believes that, if the loan to B is not modified,
there is a significant risk of default by B upon maturity of the mortgage loan. Therefore, S and B agree
to modify the mortgage loan by extending its maturity and increasing the interest rate. S reasonably believes that this modification reduces the risk of default. The modification is a significant modification
under § 1.1001–3(e). The modification occurs after
the effective date of this revenue procedure.
.02 Analysis. S reasonably believed that the premodification loan presented a significant risk of default and that the modification substantially reduced
that risk. Accordingly, the modification is within the
scope of this revenue procedure.

SECTION 8. EFFECTIVE DATE
This revenue procedure applies to loan
modifications effected on or after January
1, 2008.

2009–40 I.R.B.

SECTION 9. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Diana Imholtz of the Office

2009–40 I.R.B.

of Associate Chief Counsel (Financial
Institutions and Products). For further
information, contact Ms. Imholtz at (202)
622–3930 (not a toll-free call).

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October 5, 2009