IRS Publishes Guidance to REITs Holding Distressed Debt

Summary: Last week, the IRS issued Revenue Procedure 2011-16 (the “Revenue Procedure”) providing guidance on the qualification of a “real estate investment trust” (a “REIT”) holding distressed debt secured by real estate that has declined in value. Maintenance of REIT status requires compliance with an intricate set of rules regarding the type of income earned, and the type of assets held, by the entity seeking to qualify as a REIT, as well as the number and type of REIT shareholders. The Revenue Procedure provides safe harbors for the treatment of interest on distressed debt under the REIT income tests, and the treatment of mortgage loans under the REIT asset test. The attached Client Alert provides an overview of the Revenue Procedure.