Download top 2016 developments in real estate

THE TOP 2016 DEVELOPMENTS IN REAL ESTATE FINANCE
By Brook Boyd 1
Table of Contents
LENDER HIGHLIGHTS ................................................................................................... 3
Growth of Global Online Lending & New U.S. Fintech Charters ..................................... 3
New Accounting Rules for Credit Losses ........................................................................ 3
Margin Requirements for Uncleared Derivatives ............................................................. 4
Anti-Money Laundering (“AML”) & Bank Secrecy Act (“BSA”) Regulatory
Changes .......................................................................................................................... 4
Federal requirements for “beneficial owner” customer due diligence ................... 4
FinCen Geographical Targeting Orders................................................................ 5
NYS Anti-Money Laundering Regulations ............................................................ 5
FATF Report on U.S. Compliance With FATF Recommendations ....................... 5
Future AML & BSA Changes ................................................................................ 5
New Cybersecurity Requirements for Regulated Lenders............................................... 6
New Cases Restricting Rights of Lenders to Prevent Borrower Bankruptcies................. 6
Circuit Split Over Whether Equal Priority Rule Applies to Settlements
Involving Debtors in Bankruptcy Cases ........................................................................... 7
Another Circuit Split Regarding Whether Payments Through Financial
Institutions are Avoidable as Fraudulent Transfers ......................................................... 7
LIBOR Will Probably Be Replaced by a New Rate Designated by the U.S.
ARRC .............................................................................................................................. 8
Lien Creditor May Prevail Over Secured Lender With Perfected Security
Interest in Deposit Account Proceeds ............................................................................. 8
Loan Sales ...................................................................................................................... 9
Loan Buyer That Agrees to Pay More Than the $500,000 NYS
Champerty Exemption is Still Barred From Enforcing its Notes ...................... 9
Bank Must Sell Its Loan to Highest Bidder Even Though Bank Never
Received Deposit and Signed Contract .......................................................... 9
Why a Condition Precedent Provides More Protection Than a Mere
Promise ......................................................................................................... 10
Additional Due Diligence May Be Required in Coastal Areas Because of
Climate Changes ........................................................................................................... 10
New Earthquake Assessment Standard ........................................................................ 11
Risks of Loans to Benefit Corporations ......................................................................... 11
MISCELLANEOUS LENDER ITEMS ............................................................................ 11
CMBS Risk Retention Rules Became Effective 12/24/16. .................................. 11
IRS 1099-C is no longer generally required for debts that are more
than 36 months in arrears. ............................................................................ 11
The new ALTA/NSPS requirements for surveys became effective
2/23/16. ......................................................................................................... 11
Lenders must send a revised IRS 1098 to individual borrowers,
effective with returns filed in 2017. ................................................................ 11
The Amended Military Lending Act Requirements Became Binding on
10/3/16 .......................................................................................................... 12
State Regulators May Issue More Regulations For Lenders as Federal
Regulators Withdraw. .................................................................................... 12
BORROWER HIGHLIGHTS .......................................................................................... 12
IRS Restrictions on “Bottom” Guaranties ...................................................................... 12
New Accounting Rules For Leases ............................................................................... 12
When a “Lease” May Be Recharacterized as a Loan .................................................... 13
MISCELLANEOUS BORROWER ITEMS ..................................................................... 13
Exclusion (From Gross Income Of Discharge Of Qualified Principal
Residence Indebtedness) Has Expired. ........................................................ 13
Deduction (for Payment or Accrual of Mortgage Insurance Premiums)
is No Longer Available in 2017...................................................................... 13
2
LENDER HIGHLIGHTS
Growth of Global Online Lending & New U.S. Fintech Charters
On December 2, 2016, Thomas Curry, the Comptroller of the Currency, said that “in just
five years investment in [the financial technology] sector has grown from $1.8 billion to
$24 billion worldwide.” 2 A recent example of a fintech commercial loan involved a
developer who needed $1.3 million to buy and renovate a three-story brownstone in the
Bedford-Stuyvesant neighborhood of New York City. This loan was funded through the
website of Haitou360, an investment service in New York with offices in China. The loan
involved a 13% return for the Chinese investors, who funded the loan in Chinese renminbi,
but will be paid in U.S. dollars because of Chinese currency restrictions. Haitou360 also
buys loans from American crowdfunding platforms such as RealtyMogul and Patch of
Land. 3
One issue is whether fintech companies will be entitled to receive federal bank charters,
which may allow them to avoid certain state law requirements (such as usury laws in
certain transactions) that may be pre-empted in the case of federally regulated lenders. 4
The Superintendent of the New York State Department of Financial Services has opposed
such charters. 5 Nonetheless, Comptroller Curry said, “the OCC will move forward with
chartering financial technology companies that offer bank products and services.” 6
However, Comptroller Curry may be removed from office by the new administration, 7 so
at this point the status of fintech national bank charters is still uncertain.
Some fintech companies might elect to join industry associations, such as The
Marketplace Lending Association, which has issued Operating Standards that are binding
on its members, which currently include Funding Circle, Lending Club, and Prosper. 8
New Accounting Rules for Credit Losses
FASB and the banking regulators have concluded that the existing method of
accounting delays the recognition of credit losses on loans, and results in loan loss
allowances that are “too little, too late.”9 Accordingly, FASB has issued a new
accounting standard, 10 known as the current expected credit losses methodology
(“CECL”), which will tend to accelerate the recognition of credit losses.
The acceleration of credit losses under CECL will likely increase allowance levels, and
lower the retained earnings component of equity, thereby lowering common equity tier 1
capital for regulatory capital purposes. 11 This will give lenders a stronger incentive to
avoid risky loans, such as construction or mezzanine loans, and to sell any loans that
are likely to suffer credit losses.
For public business entities that are SEC filers, CECL will apply during fiscal years
beginning after December 15, 2019, including interim periods within those fiscal years.
For other entities, CECL will generally apply to fiscal years beginning after December
15, 2020. 12
3
Margin Requirements for Uncleared Derivatives
Derivatives are used by 69% of banks as a risk management tool. 13
September 1, 2016 was the initial effective date of a final rule (the “Final Rule”) 14
establishing minimum margin and capital requirements for the largest registered swap
dealers, major swap participants, security-based swap dealers, and major securitybased swap participants, for which one of the federal financial agencies was the
prudential regulator (collectively called “covered swap entities”), 15 with respect to noncleared swaps and non-cleared security-based swaps. March 1, 2017 is the effective
date with respect to the requirements in the Final Rule for variation margin for
certain smaller covered swap entities with respect to non-cleared swaps and noncleared security-based swaps entered into with other counterparties. 16 September 1,
2017 is the effective date with respect to the requirements in the Final Rule for initial
margin for such smaller covered swap entities with respect to non-cleared swaps and
non-cleared security-based swaps entered into with other counterparties. 17
The ISDA Standard Initial Margin Model (ISDA SIMM) has generally been used, effective
as of September 1, 2016, to calculate initial margin for non-cleared derivatives trades. 18
ISDA has also issued (1) credit support documents relating to initial margin and variation
margin, (2) a protocol that allows multiple parties to be governed by the same documents
in order to comply with variation margin rules, and (3) a self-disclosure letter that enables
companies to confirm whether they are governed by margin requirements in various
jurisdictions. 19
U.S. financial regulators have issued proposed regulations requiring that swaps and other
derivatives issued by global systemically important banking organizations (i.e., the largest
banks operating in the U.S.) (1) contain a contractual stay-and-transfer provision
analogous to the statutory stay-and-transfer provision imposed under Title II of the DoddFrank Act and in the Federal Deposit Insurance Act, and (2) limit the exercise of default
rights based on the insolvency of an affiliate of a covered bank. 20
Anti-Money Laundering (“AML”) & Bank Secrecy Act (“BSA”) Regulatory Changes
Federal requirements for “beneficial owner” customer due diligence
FinCEN issued new “customer due diligence” regulations under the Bank Secrecy Act,
that are binding as of May 18, 2018, requiring banks and other financial institutions to
identify and verify the beneficial owners of entities that are their customers. 21 The
financial institution may comply either by obtaining the required information on a standard
certification form 22 or by any other means that comply with the substantive requirements
of the applicable regulation. 23 The financial institution may rely on the beneficial
ownership information supplied by the customer, provided that it has no knowledge of
facts that would reasonably call into question the reliability of such information. The
identification and verification procedures for beneficial owners are very similar to those
for individual customers under a financial institution’s customer identification program
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(CIP), 24 except that for beneficial owners, the institution may rely on copies of identity
documents.
“When a financial institution detects information (including a change in beneficial
ownership information) about the customer in the course of its normal monitoring that is
relevant to assessing or reevaluating the risk posed by the customer, it must update the
customer information, including beneficial ownership information. Such information could
include, e.g., a significant and unexplained change in the customer’s activity, such as
executing cross-border wire transfers for no apparent reason or a significant change in
the volume of activity without explanation. It could also include information indicating a
possible change in the customer’s beneficial ownership.” 25
FinCen Geographical Targeting Orders
On January 13, 2016, FinCEN issued “Geographical Targeting Orders” requiring U.S. title
companies, from March 1, 2016 to August 27, 2016, to identify the natural persons behind
companies making cash payments for residential real estate in the Borough of Manhattan,
New York, and Miami-Dade County, Florida. On July, 27, 2016, FinCEN expanded the
geographical scope of these orders for the 180 day period beginning August 28, 2016. 26
NYS Anti-Money Laundering Regulations
The New York State Department of Financial Services has issued anti-money laundering
regulations for financial institutions that are subject to its jurisdiction. These regulations
are effective January 1, 2017, and require each regulated institution to adopt a transaction
monitoring and filtering program, and also to file annually, beginning April 15, 2018, a
certification of compliance with such regulations. 27
FATF Report on U.S. Compliance With FATF Recommendations
The Financial Action Taskforce (“FATF”) issued a report complaining that the U.S. AML
“regulatory framework has some significant gaps, including minimal coverage of certain
institutions and businesses (investment advisers (IAs), lawyers, accountants, real estate
agents, trust and company service providers (other than trust companies). . . . Lawyers,
accountants, high-end real estate agents and trust and company service providers (other
than trust companies) who establish or otherwise facilitate access to financial services for
legal persons and arrangements are not subject to comprehensive AML/CFT
requirements, and are not systematically applying basic or enhanced due diligence
processes and other preventive measures, as needed; and this is further exacerbated by
the deficiencies in the [beneficial ownership] requirements.” 28
Future AML & BSA Changes
The U.S. Treasury Department has addressed, in part, the above FATF concerns
regarding beneficial ownership by (1) the FinCEN customer due diligence regulations
discussed above, and (2) proposed legislation that would require single-member limited
liability companies to obtain a taxpayer identification number, and report ownership and
transaction information to the IRS. 29 However, unresolved issues are the extent to which
(1) additional laws will require further disclosure of beneficial ownership of legal entities,
and (2) attorney trust accounts will be subject to stricter future regulation. 30
5
New Cybersecurity Requirements for Regulated Lenders
The Federal Financial Institutions Examination Council (FFIEC) has issued new guidance
covering “the risks associated with mobile financial services and emphasiz[ing] an
enterprise-wide risk management approach to effectively manage and mitigate those
risks.” 31
The federal banking regulators have issued an “advance notice of proposed rulemaking .
. . regarding enhanced cyber risk management standards . . . for large and interconnected
entities under their supervision and those entities’ service providers.” 32 This primarily
relates to the largest financial institutions and their providers, and cybersecurity risks that
could cause systemic failure in the financial markets.
The New York State Department of Financial Services has issued proposed cybersecurity
regulations - with respect to banks and other financial institutions that are subject to its
jurisdiction - that are intended to be effective as of March 1, 2017, subject to certain
transition periods from 180 days to two years. 33 These regulations require each regulated
entity, for example, to (1) “maintain a cybersecurity program designed to protect the
confidentiality, integrity and availability” of its computer systems, and (2) create and
maintain a cybersecurity policy. A certificate of compliance with these regulations must
be submitted annually, commencing February 15, 2018.
New Cases Restricting Rights of Lenders to Prevent Borrower Bankruptcies
Some creditors have attempted to minimize the risk that a debtor will file for bankruptcy
by issuing a single share (called a “golden share”) in the debtor to a creditor, and then
amending the organizational documents of the debtor to provide that no bankruptcy filing
can be made by the debtor unless all shareholders have consented to such filing.
However, a court has ruled that a lender, who “bought and paid for [one] Common Unit
(including all rights related thereto)” in a limited liability company, was not entitled to
enforce the requirement, in its limited liability company agreement, that only the
unanimous consent of its members could authorize a bankruptcy filing. 34
In another case, after a borrower’s default, its lender was appointed as a “Special
Member”, pursuant to both a forbearance agreement between the borrower and the
lender, and an amendment to the borrower’s operating agreement, and such amendment
provided that the “Special Member” could selfishly consider only its own interests. The
forbearance agreement stipulated that the borrower owed $2,641,147.89 to the lender.
The lender, as “Special Member”, had the right to approve or reject any “Material Action,”
including any bankruptcy filing by the borrower. The borrower subsequently defaulted,
and the lender then gave notice of a foreclosure sale. When the borrower filed a
bankruptcy petition, the lender filed a motion to dismiss the bankruptcy case, since the
lender did not consent to the bankruptcy filing. The borrower provided broker price
opinions, exceeding $6,000,000, for the borrower’s property, and the lender did not
dispute that the borrower had equity in its property that was mortgaged to the lender. The
court ruled that the appointment of the lender as a “Special Member,” pursuant to the
above amendment, was void because its mandate, to allow the Special Member to
6
consider only its own interests, conflicted with Michigan law and bankruptcy law.
Therefore, the court denied the lender’s motion to dismiss the bankruptcy case. 35
Circuit Split Over Whether Equal Priority Rule Applies to Settlements Involving
Debtors in Bankruptcy Cases
Generally, in a bankruptcy proceeding, a settlement will not be approved unless it is
“fair and equitable.” 36 Further, a Chapter 11 reorganization plan must provide the same
treatment to each member of the same class (called the “equal priority rule”). 37 In the
case of a pre-bankruptcy settlement among a debtor and its creditors, courts have varied
in their treatment of such settlement when the debtor subsequently files for bankruptcy.
Some courts have tended to apply the equal priority rule strictly, 38 while others have been
more flexible. 39
Another Circuit Split Regarding Whether Payments Through Financial Institutions
are Avoidable as Fraudulent Transfers
In the FTI Consulting 40 case, the 7th Circuit ruled that payments “through” financial
institutions, acting as mere conduits, are avoidable as fraudulent transfers, and are not
entitled to protection pursuant to the safe harbor in Section 546(e) 41 of the Bankruptcy
Code. In this case, Valley View Downs, a racetrack owner, paid $55 million (financed
by Credit Suisse and other lenders) for all of the stock of a competitor, and Citizens
Bank of Pennsylvania was the escrow agent for the exchange of such payments for
such stock. 42 After the closing, Valley View Downs filed for bankruptcy, and its
representative then sued one of the shareholders which received payment for such
stock, arguing that such payment was avoidable as a fraudulent transfer and on other
grounds. The 7th Circuit agreed and upheld such avoidance, acknowledging that its
ruling clashed with five other Federal Circuits. 43
However, the 2d Circuit issued an opinion, in opposition to the above 7th Circuit ruling,
in a case resulting from the bankruptcy of the Tribune Company, following a failed
leveraged buyout, sponsored by Sam Zell, that involved over $11 billion in new
financing secured by liens on the assets of the Tribune Company, and the payment to
its existing shareholders of $8 billion of the proceeds of such financing. The Second
Circuit ruled that unsecured creditors' “state law” “constructive fraudulent conveyance”
claims, were preempted by Section 546(e) of the Bankruptcy Code. The Court ruled
that Section 546(e) shields from avoidance proceedings, brought by a bankruptcy
trustee, “transfers by or to financial intermediaries effectuating settlement payments in
securities transactions or made in connection with a securities contract, except through
an intentional fraudulent conveyance claim.”44
On the other hand, a bankruptcy court in the 3rd Circuit has rejected the above 2d Circuit
decision, by ruling that a creditor’s fraudulent transfer claim under state law, in
connection with another leveraged buyout, was not preempted by Section 546(e) of the
Bankruptcy Code. 45
7
LIBOR Will Probably Be Replaced by a New Rate Designated by the U.S. ARRC
The ICE LIBOR (Intercontinental Exchange LIBOR), which was formerly called the
London Interbank Offered Rate, is a reference rate that reflects large banks’ cost of
unsecured wholesale funding. 30-50% of “CRE/Commercial mortgage” loans, and 65%
of interest rate swaps that are not exchange-traded, are based on the USD LIBOR rate. 46
In order to ensure that this rate is truly objective and not subject to any manipulation, the
Federal Reserve Board and the Federal Reserve Bank of New York organized the
Alternative Reference Rates Committee (“ARRC”) to develop LIBOR alternatives. 47
According to the AARC, “the structural integrity of USD LIBOR has been challenged as
the scarcity of underlying transactions poses a continuing risk of discontinuity or even
cessation in the production of USD LIBOR, so institutions should consider moving away
from LIBOR. . . . Under the ARRC’s paced transition plan, legacy contracts referencing
USD LIBOR would continue to do so, unless the counterparties involved collectively
wanted to renegotiate the terms of their agreements or if LIBOR ceased to be
published.” 48 Lenders and their counsel should consider revising their current LIBOR
provisions to give lenders the option to continue to base interest rates on either LIBOR or
the new rate designated by the ARRC. The current possible alternatives to USD LIBOR
include the overnight Treasury general collateral repurchase agreement (“GC repo”) rate,
and the Overnight Bank Funding Rate (“OBFR”), which is an unsecured rate. 49 One issue
is whether the new rate will be quoted on a term basis, such as for 3 months, 6 months,
etc., as is currently the case for LIBOR. ARRC has stated that it will not do so, but that
“loans could be based on a compounded average of the overnight rate chosen by the
ARRC. This compounded average could be hedged fully by an OIS [i.e., Overnight Index
Swap] contract and its reset would occur monthly or quarterly, just as in current loan
products.” 50 Obviously, this new hedging procedure could complicate interest rate resets,
and the related loan documentation.
Lien Creditor May Prevail Over Secured Lender With Perfected Security Interest in
Deposit Account Proceeds
In the Stierwalt 51 case, a secured party had a security interest (perfected by a UCC-1
filing) in “contract rights” and the proceeds thereof, including proceeds that were
deposited in a deposit account. However, the court ruled that the secured party did not
have “control” of the deposit account. The secured party’s security interest was
traceable, since only a “negligible” amount of funds in the deposit account were not the
proceeds of such contract rights. Nonetheless, the court ruled that a mere levy by a
garnishing lien creditor (without a transfer of funds to the lien creditor) effectuated a
“transfer” pursuant to Section 9-332(b) of the UCC, and that the lien creditor therefore
took free of the secured party’s perfected security interest in the deposit account
proceeds. An ABA report on this case argues that it is wrongly decided, and asserts,
“This [decision] leaves a secured party almost defenseless and makes a perfected
security interest in a deposit account (even if the secured party had control) almost
worthless. Under the court’s theory the debtor’s commencement of a bankruptcy and
the creation of the bankruptcy estate could equally be a “transfer” that defeats the rights
of the perfected secured party. Alternatively (and equally bad), Bankruptcy Code §
544(a)(1) could mean that, because the hypothetical lien creditor would beat the
secured party, the trustee wins.” 52
8
Loan Sales
80% of banks use loan sales to manage credit risk. 53 The following new cases illustrate
various pitfalls for lenders in loan sales, and how to avoid them.
Loan Buyer That Agrees to Pay More Than the $500,000 NYS Champerty Exemption is
Still Barred From Enforcing its Notes
In the Justinian Capital 54 case, Deutsche Pfandbriefbank (“DPAG”), after acquiring
various notes for $209 million, later entered into a sale and purchase agreement to sell
them to Justinian Capital. DPAG agreed to sell (1) its “Blue Heron VI notes” for a base
price of $500,000 and (2) its “Blue Heron VII notes” for a base price of $500,000. The
notes were assigned to Justinian soon after such agreement was signed, even though
the purchase price had not been paid. The only remedies of DPAG, as the loan seller
under this agreement, were that (1) interest would accrue on the $1 million purchase
price, and (2) Justinian’s share of any recovery under the notes would be reduced from
20% of the net proceeds to 15%. Within days after such agreement was signed, Justinian
sued WestLB, which was the sponsor and manager of such notes.
WestLB asserted the defense of champerty, which generally involves purchasing a note
or claim with the primary purpose of bringing a lawsuit on it. However, in New York State,
if the aggregate purchase price of the note or notes is at least $500,000, then the
champerty defense is ineffective. 55 Since, in this case, the aggregate purchase price
was $1,000,000, then wasn’t Justinian, as the note buyer, entitled to summary judgment?
Wrong – the New York Court of Appeals ruled that West LB was entitled to summary
judgment! The court ruled that since the payment of the purchase price by Justinian was
in effect contingent on the outcome of the litigation, therefore the $1 million purchase
price did not represent a “binding and bona fide obligation.”
This decision may cause a lot of lender grief, not just when the defense of champerty is
alleged, but also perhaps in other cases where lenders rely on statutory exemptions
based on the loan amount, such as in the case of usury, 56 interest on interest, 57
convertible mortgages or lender purchase options, 58 and choice of law 59 and choice of
forum 60 clauses. Suppose a lender fully disburses the principal amount of the loan, but
requires that a substantial portion of the loan be used to create reserves for future tenant
improvements, other capital improvements, and operating expenses such as real estate
taxes and insurance. What then is the amount of the loan for the purpose of these
statutes? In the case of usury, there are New York State precedents for determining the
amount of the loan. 61 However, if future courts follow the Justinian Capital case, and
employ their own customized “case by case” criteria to determine the amount of the loan
for the purpose of the above statutory exemptions, then this may cause many lenders
and their attorneys to reject New York law when drafting the “choice of law” provisions of
their loan documents.
Bank Must Sell Its Loan to Highest Bidder Even Though Bank Never Received Deposit
and Signed Contract
9
In the Stonehill case, 62 a bank gave a demonstration of how not to auction a loan. The
bank’s offering memo stated that the bank could withdraw any loan from the auction at
any time. On April 20th, the bank’s agent notified Stonehill by telephone that it had
submitted the winning bid. On April 27th, the bank’s agent sent an email to Stonehill
stating, “Subject to mutual execution of an acceptable [loan sale agreement, the bank]
has agreed to the Stonehill bid. . . . An executed signature page [of the loan sale
agreement] and 10 percent non-refundable deposit is expected no later than . . . May 2nd.”
In a May 4th email, Stonehill’s counsel offered to provide a term sheet and added, “we
hope that this arrangement will be acceptable to you and will enable us to move forward
to close quickly.” The bank’s counsel responded that he “assumed as much” and it was
“fine to proceed as [Stonehill] indicated.” An internal May 10th bank memo acknowledged
that the bank “has verbally committed to the . . . sale to Stonehill.” However, on May 16th,
the bank’s agent told Stonehill by telephone that the bank would not sell the loan to
Stonehill.
Even though the successful bidder failed to sign a written sales agreement or make a
downpayment, the court ruled that the bidder was entitled to summary judgment enforcing
its right to buy the loan. The court stated that the signed signature page and deposit
specified in the April 27th email were not conditions precedent to the auction sale but
merely “post-agreement requirements necessary for the consummation of the transfer. .
. . The fact that the parties . . . identify future events necessary to close the sale is not
the legal equivalent of an intent to delay formation of a binding contract” (emphasis
added). Therefore, the bank should have explicitly (1) listed all of the auction conditions
as conditions precedent to the effectiveness of the loan sale agreement, and (2) clarified
that the bank had no obligation to sell the loan unless and until all of such conditions had
been satisfied. Also, the bank’s agents should not have given any assurances to the
contrary.
Why a Condition Precedent Provides More Protection Than a Mere Promise
In another case, a loan sale contract also failed to specify a condition precedent. A
contract required a purchaser to give notice to the seller, of a nonconforming loan, within 3
business days of the date on which the purchaser became aware of such nonconformity.
However, the court ruled that this 3-day requirement was merely a promise, and not a
condition precedent, to a suit on behalf of investors who had acquired interests in such
loan. The court also ruled that the delivery of such notice (on behalf of such investors),
within 2-4 weeks, would not be ruled to be too late as a matter of law, and so the court
remanded to the trial court to determine, as a factual issue, whether such delivery was
substantial compliance with the contract. 63
Additional Due Diligence May Be Required in Coastal Areas Because of Climate
Changes
The New York Times recently published an article about the increased risks of storm
damage along the Atlantic and Gulf coasts of the U.S., featuring maps that graphically
highlighted the increased risks of flooding from hurricanes. 64 According to one report,
“The Corelogic 2016 storm surge analysis reveals that a total of more than 6.8 million
homes located along both the Gulf and Atlantic coasts of the U.S. are at risk of storm
10
damage. The estimated total reconstruction cost value (RCV) of these structures is just
over $1.5 trillion.”65 Moreover, the risk of storm damage is gradually increasing every
year in certain areas. According to Sean Becketti, the chief economist for Freddie Mac,
“In the United States, South Florida is one of the more-vulnerable areas. Daily high-water
levels in the Miami area have been increasing almost an inch a year.” 66
As part of the due diligence for a property, it has been suggested that the buyer, and the
buyer’s lender, should consider whether it may be advisable to view the flood claims that
have been filed with respect to such property. 67 Also, property inspection reports should
evaluate not only the current condition of the property, but also its ability to withstand
future flood and other storm damage, if the property is located in or near a special flood
hazard area. Other internet sites may also provide other relevant information. 68
New Earthquake Assessment Standard
If a lender is concerned about the impact of an earthquake with respect to a particular
property to be mortgaged, then the lender should consider obtaining a seismic risk
assessment of such property in accordance with “ASTM E2026-16a, Standard Guide for
Seismic Risk Assessment of Buildings” (2016). 69
Risks of Loans to Benefit Corporations
Some states have authorized “benefit corporations” that explicitly immunize the
directors of such benefit corporations from fiduciary liability for authorizing the benefit
corporation to engage in unprofitable businesses that have a noble social purpose, such
as affordable housing in unfavorable markets. 70 However, some lenders may prefer to
avoid lending to benefit corporations in certain cases, such as when there is a
nonrecourse loan, or a high loan to value ratio, or the lender is making a subordinate or
mezzanine loan, or is making a “character” loan that is essentially secured by the
reputation of the borrower’s principal, or a loan based at least in part on the quality and
character of the borrower’s management. Also, it is possible that rating agencies may
decline to rate, or may issue a lower rating for, a loan to a benefit corporation.
MISCELLANEOUS LENDER ITEMS
CMBS Risk Retention Rules Became Effective 12/24/16. 71
IRS 1099-C is no longer generally required for debts that are more than 36 months
in arrears. This change applies to returns and payee statements required to be filed or
provided on or after January 1, 2017. 72
The new ALTA/NSPS requirements for surveys became effective 2/23/16. 73
Lenders must send a revised IRS 1098 to individual borrowers, effective with
returns filed in 2017.
Lenders generally must report, beginning with returns filed in 2017, the following
additional information: (1) the mortgage origination date, (2) the amount of the
11
outstanding principal on the mortgage as of the beginning of the calendar year; and (3)
the address of the property securing the mortgage. 74
The Amended Military Lending Act Requirements75 Became Binding on 10/3/16
State Regulators May Issue More Regulations For Lenders as Federal Regulators
Withdraw.
Because of the announced policy of the new Trump administration to dismantle both the
Dodd-Frank Act, 76 and certain federal regulations generally, therefore, at the same time
state and local regulators have asserted their right to regulate financial institutions. 77 See,
for example, the discussions above of the new anti-money laundering and cybersecurity
regulations issued by the New York State Department of Financial Services.
BORROWER HIGHLIGHTS
IRS Restrictions on “Bottom” Guaranties
The IRS will not recognize a “bottom” guaranty (or any similar arrangement that may
involve an indemnity, deficit restoration obligation, or master lease, etc.) by a partner of
an obligation of an entity that is a partnership for income tax purposes. A “bottom”
guaranty applies only to the least risky portion of the applicable partnership obligation, for
the purpose of adding such partner’s guarantied share of such partnership obligation to
such partner’s basis for tax purposes. IRS regulations now generally recognize a
guaranty of any partnership obligation only if it is for at least 90% of the entire amount of
such partnership obligation. 78 However, a partner guaranty does not become a “bottom”
guaranty merely because either (1) the total amount covered by such guaranty is capped,
or (2) there is a contribution agreement among the partners with respect to such
partnership obligation. 79 All bottom dollar payment obligations, with respect to a
partnership liability, must be disclosed on a completed Form 8275 attached to the
partnership’s income tax return for the taxable year in which the bottom dollar payment
obligation is undertaken or modified. 80
New Accounting Rules For Leases
New lease accounting rules have been issued, generally for fiscal years commencing
after December 15, 2018, with respect to “public business entities” and other similar
entities. 81 These rules use the term “finance lease,” which is comparable to the term
“capital lease” that has been required under the accounting rules applicable to prior fiscal
years. In addition, the new rules require each tenant to recognize lease assets and lease
liabilities for all leases—finance and operating—other than short-term leases (that is, if
the entity elects the short-term lease recognition and measurement exemption). 82
Most tenants enter into “gross” leases that provide for rent payments including (1) rent for
the leased real estate, and (2) operating expenses covering various landlord services,
and real estate taxes associated with the property. In such cases, some commentators
recommend that the gross rent payments should be separated into (1) a net rent payment
with respect to the real estate, that will be capitalized, and (2) a separate payment for
such operating expenses, that will be accounted for as a current operating expense. 83
12
If the tenant is a creditworthy public company, then the new accounting rules may
incentivize such tenant to fund its own tenant improvements in order to keep the
difference between its cost of funds (which is likely to be lower than the landlord’s cost of
funds unless the landlord is also a creditworthy public company) and the landlord’s
required rate of return. 84
Since “operating leases” will now appear on the tenant’s balance sheet, therefore loan
documents should be reviewed to make sure, for example, that this does not result in
“operating leases” being classified as indebtedness for the purpose of the financial
covenants in the loan documents. 85
When a “Lease” May Be Recharacterized as a Loan
The parties to a lease should evaluate whether the lease can be recharacterized as a
loan or other type of transaction. In one case, a taxable “tenant” “leased” property from
a tax-exempt “landlord,” and paid the “landlord” a lump sum in exchange. Since the
lease term exceeded the useful life of the improvements, the lease was deemed to be a
sale of the property by the “landlord” to the “tenant.” 86 This “tenant” simultaneously
sublet the leased premises to the “landlord.” Within 6 months of the closing, 76.9% of
such lump sum (that was paid to the “landlord”) was returned to the “tenant” as a
prepayment of the sublease, and another part was set aside to secure a cancellation
option allowing the “landlord” to purchase back its property at the end of the sublease
period. Since exercising the “sublease” cancellation option was expected to be the only
economically viable option of the “landlord,” the parties anticipated that, at the end of
the sublease term, the “landlord” would exercise its “sublease” cancellation option and
regain ownership of the property. The yield of the “tenant” on its investment in the
“lease” was predetermined when the “tenant” first entered into the “lease.” Therefore,
this “lease” was recharacterized by the court, for income tax purposes, as a loan by the
“tenant” to the “landlord.” 87
MISCELLANEOUS BORROWER ITEMS
Exclusion (From Gross Income Of Discharge Of Qualified Principal Residence
Indebtedness) Has Expired.
The exclusion from gross income of “discharge of indebtedness” income, relating to
qualified principal residence indebtedness, applied to any such discharge either occurring
before January 1, 2017 or subject to an arrangement that was entered into, in writing,
before January 1, 2017. 88
Deduction (for Payment or Accrual of Mortgage Insurance Premiums) is No Longer
Available in 2017
December 31, 2016 was the deadline by which premiums must have been paid or
accrued, for qualified mortgage insurance, in connection with acquisition indebtedness
relating to a qualified residence. 89
1
Brook Boyd is Counsel at Meister Seelig & Fein LLP in its New York office, and practices in the area of
real estate and corporate transactions. He is the author of Boyd, Real Estate Financing (Law Journal Press,
13
39th ed. 2016), which can be viewed online at http://www.lawcatalog.com His professional website is at
http://www.meisterseelig.com/attorneys/Brook-Boyd
2
“Remarks By Thomas J. Curry, Comptroller of the Currency, Regarding Special Purpose National Bank
Charters for Fintech Companies,” at 1 (O.C.C. Dec. 2, 2016).
3
Emily Feng & Alexandra Stevenson, “Middle-Class Chinese Join Exodus of Wealth,” N.Y. Times, Dec.
12, 2016, at B1-B2.
4
Nathaniel Popper, “Fintech Start-Ups to Get Access to Bank Charters,” N.Y. Times, Dec. 3, 2016, at B2.
5 J. Stashenko, “NY Regulator Slams Plan for Federal Fintech Bank Charter,” New York Law J., Jan. 19,
2017, p. 1.
6
“Remarks By Thomas J. Curry, Comptroller of the Currency, Regarding Special Purpose National Bank
Charters for Fintech Companies,” at 3 (O.C.C. Dec. 2, 2016). Current OCC proposals for fintech bank
charters are summarized in “Exploring Special Purpose National Bank Charters for Fintech Companies”
(O.C.C. Dec. 2016). Regarding national bank charters generally, see 12 CFR Part 5 and the “Charters”
booklet of the Comptroller’s Licensing Manual (O.C.C. Sept. 2016), available at
https://www.occ.gov/publications/publications-by-type/licensing-manuals/charters.pdf Regarding the
current status of laws relating to fintech companies, see also “Opportunities and Challenges in Online
Marketplace Lending,” (U.S. Treas. Dept. May 10, 2016); “Examining the Extensive Regulation of
Financial Technologies” (Financial Innovation Now July 2016) (this presents the position of the fintech
industry), available at https://financialinnovationnow.org/wpcontent/uploads/2016/07/Examining_the_Extensive_Regulation_of_Financial_Technologies.pdf; J.
Tucker & O. Poindexter, “Fair Warning on FinTech: A Look at the Top Legal Issues Impacting Alternative
Lending Platforms” (ABA Consumer Fin. Serv. Comm., Bus. Law Sec. Sept. 2016); M. Alvarez, T.
Potashnik & S. Chang, “FinTech: Machine-Learning Algorithms” (ABA Bus. Law Sec. Ann. Meeting 2016);
“Marketplace Lending,” ABA Securitization & Structured Fin. Comm., Bus. Law Sec. Spring 2016).
7 D. Stein & M. Nonaka, “Post-Election Outlook for Financial Regulatory Agencies: Office of the Comptroller
of
the
Currency”
(Covington
&
Burling
Nov.
21,
2016),
available
at
https://www.covfinancialservices.com/2016/11/post-election-outlook-for-financial-regulatory-agenciesoffice-of-the-comptroller-of-the-currency/
8
See The Marketplace Lending Association website at http://www.marketplacelendingassociation.org/
9
“Frequently Asked Questions on the New Accounting Standard on Financial Instruments – Credit Losses,”
p. 2 (O.C.C. et al., Dec. 19, 2016).
10
“Financial Instruments—Credit Losses (Topic 326) - Measurement of Credit Losses on Financial
Instruments” Accounting Standards Update No. 2016-13 (Fin. Accounting Standards Bd. 2016).
11
Id. at 15.
12
Id. at 5-6.
13
“2016 Survey of Credit Underwriting Practices,” at 8 (OCC Dec. 2016).
14
“Margin and Capital Requirements for Covered Swap Entities; Final Rule,” 80 Fed. Reg. 74840, 7489899 (2015), § ____.1(e)(1) (to be codified as 12 C.F.R. §§ 45.1(e)(1) (OCC), 12 C.F.R. § 237.1(e)(1) (Fed.
Reserve), and 12 C.F.R. § 349.1(e)(1) (FDIC)).
15
This is clearly the intent of the Final Rule, as expressed in 80 Fed. Reg. 74842, § I(B). However, the
actual language of the Final Rule does not always clearly express this intent. See the definitions of “covered
14
swap entity” and “swap entity” in 80 Fed. Reg. 74898-74899 (2015), § ____.2 (to be codified as 12 C.F.R.
§ 45.2 (OCC), 12 C.F.R. § 237.2 (Fed. Reserve), and 12 C.F.R. § 349.2 (FDIC)).
16
“Margin and Capital Requirements for Covered Swap Entities; Final Rule,” 80 Fed. Reg. 74840, 7489899 (2015), § ____.1(e)(2) (to be codified as 12 C.F.R. §§ 45.1(e)(2) (OCC), 12 C.F.R. § 237.1(e)(2) (Fed.
Reserve), and 12 C.F.R. § 349.1(e)(2) (FDIC)).
17
“Margin and Capital Requirements for Covered Swap Entities; Final Rule,” 80 Fed. Reg. 74840, 7489899 (2015), § ____.1(e)(3) (to be codified as 12 C.F.R. §§ 45.1(e)(3) (OCC), 12 C.F.R. § 237.1(e)(3) (Fed.
Reserve), and 12 C.F.R. § 349.1(e)(3) (FDIC)).
18
“ISDA
SIMM
Deployed
Today”
(ISDA
Sept.
1,
2016),
available
http://www2.isda.org/search?headerSearch=1&keyword=ISDA+SIMM+Deployed+Today%3B
at
19
More information on various ISDA initiatives relating to margin requirements is available at
http://www2.isda.org/functional-areas/wgmr-implementation/
20
“Mandatory Contractual Stay Requirements for Qualified Financial Contracts,” 81 Fed. Reg. 55381 (Aug.
19, 2016).
21
“Customer Due Diligence Requirements for Financial Institutions,” 81 Fed. Reg. 29398 (May 11, 2016).
22
31 C.F.R. § 1010.230, App. A.
23
31 C.F.R. §§ 1010.230, 1020.210.
24
See 31 CFR §§ 1020.220, 1023.220, 1024.220, 1026.220.
25
81 Fed. Reg. 29399 (May 11, 2016). See generally FIN-2016-G003, “Frequently Asked Questions
Regarding Customer Due Diligence Requirements for Financial Institutions” (FinCen July 19, 2016).
26
“FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami” (Jan. 13, 2016); “FinCEN Expands
Reach of Real Estate ‘Geographic Targeting Orders’ Beyond Manhattan and Miami” (July 27, 2016),
available at https://www.fincen.gov/news/news-releases/fincen-expands-reach-real-estate-geographictargeting-orders-beyond-manhattan
27
N.Y. Comp. Codes R. & Regs. tit.3, Part 504 (2016).
28
Financial Action Task Force, “2016 Anti-money laundering and counter-terrorist financing measures United States - Mutual Evaluation Report” at 3-4, 9-10 (Dec. 2016), available at http://www.fatfgafi.org/publications/mutualevaluations/documents/mer-united-states-2016.html
29
Letter from Jacob Lew, Secretary of the U.S. Treasury Department, to Paul Ryan, Speaker of the House
(May 5, 2016), available at https://www.treasury.gov/press-center/press-releases/Pages/jl0451.aspx
30 Rachel Louise Ensign & Serena Ng, “Money Laundering Loophole: Law Firms” Dec. 27, 2016, at A1
(discussing how large amounts were allegedly taken from 1Malaysia Development Bhd., transferred to a
pooled attorney trust account of two Manhattan law firms, and then used to buy a luxury condo unit in
Manhattan and other personal items).
31
“Financial Regulators Release New Appendix for Retail Payment Systems Booklet Appendix E: Mobile
Financial Services” (FFIEC April 29, 2016), available at
https://www.ffiec.gov/press/PDF/FFIEC_booklet_Appendix_E_Mobile_Financial_Services.PDF
32
“Enhanced Cyber Risk Management Standards” 15
81 Fed. Reg. 74315 (Oct. 26, 2016).
33
“DFS Issues Updated Proposed Cybersecurity Regulation Protecting Consumers And Financial
Institutions” (N.Y.S.D.F.S. Dec. 28, 2016), available at http://www.dfs.ny.gov/about/press/pr1612281.htm
(the cybersecurity regulation is intended to be codified at N.Y. Comp. Codes R. & Regs. tit.23, Part 500).
34
In re Intervention Energy Holdings, LLC, 553 Bankr. 258 (Bankr. D. Del. June 3, 2016).
35
In re Lake Michigan Beach Pottawattamine Resort LLC, 547 Bankr. 899, 912 (N.D. Ill. 2016). But see
Boyd, Real Estate Financing § 17.02[3][a] (Law Journal Press, 39th ed. 2016).
36
Bankr. R. 9019.
37
11 U.S.C. § 1123(a)(4).
38
In re AWECO Inc., 725 F.2d 293 (5th Cir.), cert. denied 469 U.S. 880 (1984).
In re Energy Future Holdings Corp., 648 Fed. Appx. 277 (3d Cir. 2016), cert. denied 137 S. Ct. 447
(2016); In re Jevic Holding Corp., 787 F.3d 173 (3d Cir. 2015), petition for cert. granted, Czyzewski v. Jevic
Holding Corp., __ U.S. __ (June 28, 2016); In re Iridium Operating LLC, 478 F.3d 452 (2d Cir. 2007).
39
40
FTI Consulting, Inc. v. Merit Management Group, LP, 830 F.3d 690 (7th Cir. 2016), petition for cert. filed
__ U.S. __ (No. 16-784, Dec. 16, 2016).
41
Regarding the 546(e) safe harbor generally, see Boyd, Real Estate Financing §§ 3.04[3][b], 6.04[9], &
6.05[13] (Law Journal Press, 39th ed. 2016). Section 546(e) of the Bankruptcy Code provides,
(e) Notwithstanding sections 544, 545, 547, 548(a)(1)(B), and 548(b) of this title, the trustee may
not avoid a transfer that is a margin payment, as defined in section 101, 741, or 761 of this title, or
settlement payment, as defined in section 101 or 741 of this title, made by or to (or for the benefit
of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial
participant, or securities clearing agency, or that is a transfer made by or to (or for the benefit of) a
commodity broker, forward contract merchant, stockbroker, financial institution, financial
participant, or securities clearing agency, in connection with a securities contract, as defined in
section 741(7), commodity contract, as defined in section 761(4), or forward contract, that is made
before the commencement of the case, except under section 548(a)(1)(A) of this title.
42
Id. at 691-692.
43
Id. at 697.
44
In re Tribune Company Fraudulent Conveyance Litigation, 818 F.3d 98, 106 (2nd Cir. 2016), petition for
cert. filed __ U.S. __ (No. 16-317, Sept. 9, 2016).
45 PAH Litigation Trust v. Water Street Healthcare Partners, L.P. (In re Physiotherapy Holdings, Inc.), 2016
WL 3611831 (Bankr. D. Del. June 20, 2016).
46
“Interim Report and Consultation” at 7, Table 1 (ARRC May 2016), available at
https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2016/arrc-interim-report-andconsultation.pdf?la=en
47
R. Berner, “Time is Right for LIBOR Alternative” (Off. Fin. Res., U.S. Treas. Dept., Dec. 8, 2016),
https://www.financialresearch.gov/from-the-director/2016/12/08/time-is-right-for-liboravailable
at
alternative/
48
“Frequently Asked Questions - The ARRC Interim Report” (ARRC 2016), available at
https://www.newyorkfed.org/arrc/faq
16
49
Id.
50
Id.
51
Stierwalt v. Associated Third Party Admin., 2016 WL 2996936 (N.D. Cal. May 25, 2016).
52
S. Weise et al., 2015-2016 Commercial Law Developments at 22-23 (ABA Bus. Law Sec., Annual
Meeting, June 2016).
53
“2016 Survey of Credit Underwriting Practices,” at 8 (OCC Dec. 2016).
54
Justinian Capital SPC v. WestLB, 28 N.Y.3d 160 (2016).
55
N.Y. Jud. Law § 489(2) (2017).
56
N.Y. Gen. Oblig. Law § 5-501(6) (2017).
57
N.Y. Gen. Oblig. Law § 5-527 (2017).
58
N.Y. Gen. Oblig. Law § 5-334 (2017).
59
N.Y. Gen. Oblig. Law § 5-1401 (2017).
60
N.Y. Gen. Oblig. Law § 5-1402 (2017).
61
E.g., Band Realty Co. v. North Brewster, Inc., 37 N.Y.2d 460, 373 N.Y.S.2d 97, 335 N.E.2d 316 (1975).
62 Stonehill Capital Management, LLC v. Bank of the West, 2016 WL 7348990 (N.Y. Ct. App. Dec. 20,
2016). See also G. Smith & T. Hall, “Conditions Precedent and the Need for Unambiguous Terms,” New
York Law Journal, June 17, 2016.
63
Bank of New York Mellon Trust v. Morgan Stanley Mortgage Capital, 821 F.3d 297 (2d Cir. Apr. 27,
2016). See also Boyd, Real Estate Financing § 21.03[3][b] at 21-10 to 21-11 & fn. 14.1 (Law Journal Press,
39th ed. 2016) (discussing the impact of ACE Securities v. DB Products, 25 N.Y.3d 581 (2015) and more
recent lower courts that have ruled on the same issues).
64 Ian Urbina, “Perils of Climate Change Could Swamp Coastal Real Estate,” N.Y. Times, Nov. 25, 2016,
https://www.nytimes.com/2016/11/24/science/global-warming-coastal-realat
A1
available
at
estate.html?_r=0
65
The 2016 Corelogic Storm Surge Report is available at
http://corelogic.maps.arcgis.com/apps/MapJournal/index.html?appid=0cd57ed426974442ac92861593180
3cd
66
Sean Becketti, “Life’s a Beach” (April 26, 2016)
67
One report of insurance claims is called CLUE, for Comprehensive Loss Underwriting Exchange (more
information
is
available
at
https://personalreports.lexisnexis.com/homesellers_disclosure_report/landing.jsp), and the other is called
A-PLUS (http://www.verisk.com/underwriting/property/a-plus-property.html).
68
69
See generally Boyd, Real Estate Financing § 6.03[45][a] (Law Journal Press, 39th ed. 2016).
This ASTM guide is available at https://www.astm.org/Standards/E2026.htm
17
70
Del. Code tit. 8, §§ 362, 365 (2016).
71
79 Fed. Reg. 77602.
72
T.D. 9793, I.R.B. 2016-48 (Nov. 28, 2016) (amending Treas. Reg. § 1.6050P-1).
73
“Minimum Standard Detail Requirements For ALTA/NSPS Land Title Surveys” (effective February 23,
2016), available at http://www.nsps.us.com/index.cfm?fuseaction=page.viewpage&pageid=670 Note that
National Society of Professional Surveyors (“NSPS”) is the successor to American Congress on Surveying
and Mapping (“ACSM”).
74 “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015,” P.L. 114-41, __
Stat. ___, § 2003 (July 31, 2015).
75
80 Fed. Reg. 43560, 43595 (2015).
76
“Financial
Services”
(Pres.-Elect
Donald
https://www.greatagain.gov/policy/financial-services.html
J.
Trump),
available
at
77
J. Stashenko, “Trump Presidency Could Shift Regulatory Spotlight to State and AG,” N.Y.L.J., Nov. 15,
2016, at 1.
78 Temp. Treas. Reg. § 1.752–2T(b)(3)(ii)(A-B). “Bottom dollar payment obligations” are defined in Temp.
Treas. Reg. § 1.752–2T(b)(3)(ii)(C)(1). The temporary regulations generally (1) “apply to liabilities incurred
or assumed by a partnership and payment obligations imposed or undertaken with respect to a partnership
liability on or after October 5, 2016,” with some exceptions, and (2) expire on October 4, 2019. Temp.
Treas. Reg. § 1.752–2T(l-m). See also Prop. Treas. Reg. §§ 1.704-1(c)(2), 1.752–2(j)(3)(ii)(A-G), 1.7041(b)(2)(ii)(b)(3-7), & § 1.704-1(b)(2)(ii)(c)(1-4), 81 Fed. Reg. 69301 (Oct. 5, 2016).
79
Temp. Treas. Reg. § 1.752–2T(b)(3)(ii)(C)(2). See id. § 1.752–2T(f), Ex. 10.
80
Treas. Reg. § 1.752–2T(b)(3)(ii)(D).
81 LEASES (TOPIC 842), ASU No. 2016-02 at 2-9 (Fin. Accounting Standards Bd. Feb. 2016). For all other
entities that report in accordance with GAAP, the new lease accounting rules are effective for fiscal years
beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15,
2020.
82
Id. at 5.
83
“The New Lease Accounting Standards Are Issued: What Real Estate Strategies Should
http://www.cbre.com/~/media/files/fasbLessees
Consider?”
at
2
(CBRE
Feb.
2016),
iasb/newleaseaccountingstandards_feb2016__final.pdf?la=en (last visited July 29, 2016).
84
Id.
85
E. Gross et al., “When You “Leased” Expect It: The Implications of the Characterization (Or ReCharacterization) of Personal Property Financings Documented As Leases at 47 (ABA U.C.C. Comm., Bus.
Law Sec., 2016 Ann. Meeting).
86
Exelon Corp. v. Comm’r, 147 T.C. No. 9, at 37, 100 (Sept. 19, 2016). See generally Boyd, Real Estate
Financing § 10.09[2][g] (Law Journal Press, 39th ed. 2016).
87
Id. at 1-2, 118, 157-158. Exelon Corp. v. Comm’r,18
147 T.C. No. 9, at 1-2, 118, 157-158 (Sept. 19, 2016).
88 “Protecting Americans from Tax Hikes Act of 2015,” Pub. L. No. 114-113, § 151 (Dec. 18, 2015) (to be
codified as an amendment to 26 U.S.C. § 108(a)(1)(E)). It is possible that this exclusion may be
retroactively reinstated when the Congress reconvenes in 2017. Alistair M. Nevius, “Despite PATH Act,
Some Tax Provisions Expire at End of 2016,” Tax Adviser, Dec. 16, 2016, available at
http://www.thetaxadviser.com/news/2016/dec/tax-provisions-expiring-in-201689
“Protecting Americans from Tax Hikes Act of 2015,” Pub. L. No. 114-113, § 152 (Dec. 18, 2015) (to be
codified as an amendment to 26 U.S.C. § 163(h)(3)(E)(iv)(I)). It is possible that this exclusion may be
retroactively reinstated when the Congress reconvenes in 2017. Alistair M. Nevius, “Despite PATH Act,
Some Tax Provisions Expire at End of 2016,” Tax Adviser, Dec. 16, 2016, available at
http://www.thetaxadviser.com/news/2016/dec/tax-provisions-expiring-in-2016-
19