More trouble for CMBS backed by properties owned by real estate magnate Simon Halabi — tax problems.
From the Irish Stock Exchange:
RNS Number : 6233Y
White Tower 2006-3 PLC0
7 September 2009
WHITE TOWER 2006-3 plc
THIS NOTICE CONTAINS IMPORTANT INFORMATION OF INTEREST TO THE BENEFICIALOWNERS OF THE NOTES. IF APPLICABLE, ALL DEPOSITARIES, CUSTODIANS AND OTHERINTERMEDIARIES RECEIVING THIS NOTICE ARE REQUESTED TO PASS THIS NOTICE TOSUCH BENEFICIAL OWNERS IN A TIMELY MANNER.
NOTICE to the holders of the outstanding
£678,500,000 Class A Commercial Mortgage Backed Floating Rate Notes due2012 ISIN: XS0275770914
£171,500,000 Class B Commercial Mortgage Backed Floating Rate Notes due2012 ISIN: XS0275771649
£116,000,000 Class C Commercial Mortgage Backed Floating Rate Notes due2012 ISIN: XS0275772704
£116,000,000 Class D Commercial Mortgage Backed Floating Rate Notes due2012 ISIN: XS0275773181
£68,000,000 Class E Commercial Mortgage Backed Floating Rate Notes due2012 ISIN: XS0275774072
This notice has been prepared by CB Richard Ellis Loan Servicing Limited as Special Servicer and is issued at its request.
Withholding Tax . . .
It has come to our attention that several of the managers of the Properties forming the security for the Loans have been served notices (“Notices”) by Her Majesty’s Revenue and Customs (HMRC) revoking theBorrowers’ exemption from the Non Resident Landlords Scheme in respect of most of the Properties. Under the Non Resident Landlords Scheme, those remitting revenue to landlords which are not UK resident for tax purposes are required to apply withholding tax to any amounts remitted. HMRC usually grants exemption to landlords who agree to pay tax due on their net income. The effect of the Notices is that withholding tax will be incurred reducing the funds available from each Property affected. Any excess tax will be released on finalisation of the actual tax payable after the end of each tax year. We are currently in discussions with the Borrowers and investigating the reasons for the action taken by HMRC and consulting our advisors with aview to finding a resolution to this issue.
As the statement suggests, the withheld tax immediately reduces the amount of funds available from the properties, though analysts say it will still leave enough cash to cover interest on the CMBS bonds involved. The real problem though is that the special servicer — CB Richard Ellis — now has to do stuff like hire lawyers and auditors to review the situation, which will inevitably increase senior costs on the deal.
What’s more, given that Halabi’s property companies are in default, the holders of WTOW 2006-3 will probably be unable to rely on them to pay the tax.
Here’s BarCap’s Hans Vrensen with his commentary:
Also, the ultimate tax liabilities will unlikely be covered by group companies, given the status of the ultimate sponsor. This means CMBS bondholders could potentially suffer a bigger loss, due to tax liabilities, than otherwise would have been the case.
This could be very disturbing news for CMBS investors in general. Since the situation raises concerns for other CMBS transactions, investors now might need to more fully understand the tax structure of the borrowers and how an adverse change in tax treatment can be triggered.
As if the CMBS market didn’t have enough to worry about — it’s now got tax issues.
Related links:
RBS and Lloyds “most exposed” to CRE, CreditSights says – FT Alphaville
The Halabi CMBS crunch – FT Alphaville