After the Loan is Closed –

Attorneys’ Opinions in Connection

with Loan Assumptions,

Modifications and Defeasances/

REMIC Opinions

May 1, 2008

Ziemowit T. Smulkowski

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What is a REMIC?

• Real Estate Mortgage Investment Conduit

• A tax election for an arrangement used to issue mortgage-

backed securities

• Provides for taxation of interest income on a flow-through

basis to investors (i.e., no double tax)

• Intended to be a substantially fixed pool of real estate

mortgages and related assets

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Why Do I Need a REMIC Opinion?

• Required by Pooling and Servicing Agreement (“PSA”) and/or loandocuments

• Provides comfort to REMIC that proposed transaction will notadversely affect the REMIC

• Transactions that could adversely affect the REMIC include

– Loan modifications

– Loan assumptions

– Loan defeasances

• Adverse affect on the REMIC could include

– 100% tax on net income from “prohibited transactions”

– Loss of REMIC status

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100 Percent Tax on

Prohibited Transactions

• 100 percent tax on net income from prohibited transactions

• A prohibited transaction includes a disposition of a qualified

mortgage subject to certain exceptions

560637656 - 3/31/08

Termination of a REMIC

• Failure to satisfy statutory requirements for REMIC status at

any time during taxable year

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REMIC Requirements

• At the close of the 3rd month beginning after the startup date

and at all times thereafter substantially all of the assets

which consist of qualified mortgages and permitted

investments.

– De minimis amount of other assets permitted

– 1% safe harbor

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Qualified Mortgages

• Any obligation which is principally secured by an interest in

real property and which is

– Transferred to the REMIC on the startup day, or

– Purchased by the REMIC within the 3-month period

beginning on the startup day if, except as provided in

regulations, such purchase is pursuant to a fixed price

contract in effect on the startup day

860637656 - 3/31/08

Applicable Rules

• REMIC Rules

– Defeasance rules (Treasury Regulation Section 1.860G-

2(a)(8))

– Assumption and modifications rules (Treasury Regulation

Section 1.860G-2(b))

• Cross reference to the “Cottage Savings” rules for

definition of a significant modification

• Additional exceptions

• Debt Modification (a/k/a “Cottage Savings”) Rules (Treasury

Regulation Section 1.1001-3)

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Defeasance Rules

• REMIC releases lien on real property that secures aqualified mortgage

• Mortgage ceases to be a qualified mortgage

– Exception

• Mortgagor pledges substitute collateral that consistssolely of government securities

• The mortgage documents allow such a substitution

• The lien is released to facilitate the disposition of theproperty or any other customary commercial transaction,and not as part of an arrangement to collateralize aREMIC offering with obligations that are not real estatemortgages

• The release is not within 2 years of the startup day

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Assumption and Modification Rules

• A significant modification is treated as an exchange of the

obligation

BorrowerBorrowerBorrowerREMICREMICREMIC

Old LoanOld Loan

New LoanNew Loan

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Assumption and Modification Rules(continued)

• Consequences

– New obligation not a qualified replacement mortgage/qualifiedmortgage

• Requirement that substantially all of the assets of the REMICconsist of qualified mortgages and permitted investmentspotentially violated

– REMIC terminates

» REMIC subject to entity level taxation

– Deemed disposition of old obligation is a prohibitedtransaction

» 100% Tax on income from prohibited transactions

BorrowerBorrowerBorrowerREMICREMICREMIC

Old LoanOld Loan

New LoanNew Loan

1260637656 - 3/31/08

REMIC Assumption and

Modification Rules

• Additional exceptions to debt modification rules

– Changes in terms of the obligation occasioned by default or a

reasonably foreseeable default

– Assumption of the obligation

• Buyer of the mortgaged property acquires the property

subject to the mortgage, without assuming personal liability

• The buyer becomes liable for the debt but the seller also

remains liable

• The buyer becomes liable for the debt and the seller is

released by the lender

– Waiver of a due-on-sale or a due-on-encumbrance clause

– Conversion of an interest rate by a mortgagor pursuant to the

terms of a convertible mortgage

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Debt Modification Rules

• Two part test for significant modification

– Is there a modification

– Is modification significant

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Debt Modification Rules

• Is there a modification

– Any alteration of a legal right or obligation of issuer orholder

– Exception for alterations occurring pursuant to terms ofdebt instrument

• Exception to exception

– Substitution of a new obligor, addition or deletionof a co-obligor, or change (in whole or in part) inrecourse nature of a debt instrument

– Alteration that results in an instrument or aproperty right that is not debt other than aholder’s conversion right to convert debt intoequity

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Debt Modification Rules

• Is there a modification (continued)

– Additional option rules

• Option must be unilateral

– Exercise of option does not give other party right

to alter, terminate or put the instrument to a

person related to issuer

– No consent required

– No consideration required

• An option exercisable by the holder does not result in

deferral or reduction in payment of interest or

principal

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Debt Modification Rules

• Is modification significant

– An economically significant alteration of legal rights orobligations

– Change in yield

– Change in timing payments

– Change in obligor or security

• Substitution of new obligor on a recourse debt instrument

• Substitution of a new obligor on a nonrecourse debtinstrument

• Addition or deletion of co-obligor

• Change in security or credit enhancement

– Recourse debt instruments

– Nonrecourse debt instruments

• Change in priority of debt

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Debt Modification Rules (continued)

• Is modification significant

– Change in nature of a debt instrument

• Property that is not debt

• Change in recourse nature

– Recourse to nonrecourse

– Nonrecourse to recourse

• Change in accounting covenants

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Things to Watch-Out For

• Defeasance

• Release of collateral (including partial release of collateral)

– Tearing down of improvements

– Change of reserve requirements

– Release of condemnation/insurance proceeds

• Addition to collateral

• Improvement to collateral

• Swap of collateral

• Release of a guarantee

• Addition of a guarantee

• Change of guarantor

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Things to Watch-Out For (continued)

• Change of a guarantee

• A change in yield

– Change in interest rate

– Change in payment schedule

• Prepayment

• Addition or subtraction of an obligor

• Assumption

• Assumption plus

• Change in recourse nature

– SPE provisions

• Solvency covenants

2060637656 - 3/31/08

Proposed 2007 Amendments

to REMIC Rules

• Recognize that

– Securitization of commercial mortgage loans has become more

common since the adoption of the REMIC regulations in 1992

– Exceptions in the REMIC rules to the debt modification rules

may not cover the range of likely changes in commercial

mortgage loans

• Intend to strike balance between

– Accommodating the legitimate business concerns of the

commercial real estate industry

– Requirement that a REMIC remain a substantially fixed pool of

mortgages and not be engaged in an active lending business

2160637656 - 3/31/08

Proposed 2007 Amendments

to REMIC Rules

• Permit modifications

– That release, substitute, add or otherwise alter a substantial

amount of collateral for, guarantee on, or other form of credit

enhancement for a recourse or nonrecourse obligation

– That change in the nature of the obligation from recourse to

nonrecourse

• Require that obligation remain principally secured by an interest in

real property

– Fair market value (“FMV”) of the interest in real property on the

date of the modification equals at least 80% of the adjusted

issue price of the modified obligation

– FMV must be determined by an appraisal performed by an

independent appraiser