Andrea Whiteway, partner with the law firm McDermott, Will & Emery LLP, joined REIT.com for a video interview during REITWise 2014: NAREIT’s Law, Accounting and Finance Conference held in Boca Raton, Fla.
Whiteway discussed the potential impact of proposed partnership debt regulations on UPREIT transactions.
“Basically, what these new regs provide are that with respect to any payment obligation that a partner enters into, they have to meet six recognition requirements,” she said. “These requirements tie to what the IRS views as commercial loan arrangements and commercial payment obligations. From the IRS’s perspective in drafting these regs, they’re saying… if you are going to be entering into a guarantee, you should be getting arm’s length consideration. I don’t believe that is necessarily what most of the commercial markets require, but in the IRS’s perspective, that’s what they’re requiring.”
Of even more significance to REITs, according to Whiteway, one of the recognition requirements is that the payment obligation term has to be the same term as the payment liability.
“In other words, if I’m guaranteeing a loan, I have to guarantee that loan until the full term of the loan,” she said. “Oftentimes, in a REIT context, the REIT will agree to let you off the guarantee on certain events.”
Now, those events, such as the death of the borrower, will not be recognized with respect to the guarantees going forward, Whiteway said.
Whiteway also discussed deficit restoration obligations as a mechanism to transfer deferral to taxpayers.
“A deficit restoration obligation by its terms to comply what the partnership rules require does not end the term of the loan. It can end earlier,” she said. “So, in essence, the way operating partnerships have historically allocated debt to property contributors… that whole mechanism of being able to allocate debt to them through this recourse facility will go away after these regs are finalized.”
As a result, Whiteway said operating partnerships will need to evaluate what is in their existing agreements.