A Note of Holiday Thanks and Well Wishes to all…

Dear Family, Friends, Clients and Colleagues,

I founded Anderson Tax & Finance Law less than three months ago – on September 12, 2016 – without much more than your support, deep capital markets tax law experience, an entrepreneurial spirit brimming with optimism, and a boundless work ethic dedicated to my firm’s mission: Deliver best-in-class legal service, on time, for a reasonable price.

During this very short time, Anderson Tax & Finance Law has designed a distressed debt fund; created an international corporate business structure; vetted an international project finance investment structure; structured a debt and real estate fund platform; and worked on myriad other corporate and finance-related tax matters.

Anderson Tax & Finance Law is deeply grateful, thanks each of its clients, and announces in appreciation today that its legal rates and the fixed fees on its fixed-fee engagements will not be increasing in 2017.

Happy Holidays & Cheers to Growth and Swinging for the Fences in 2017!

—Todd—

Todd S. Anderson
Direct Dial: 646-942-0311
Website: http://andersontaxandfinance.com/
Bio: http://andersontaxandfinance.com/attorney-profile/

andersonsm
61 Massachusetts Avenue, PO Box 205, Hyannis Port, MA 02647

 

Time-Sensitive REMIC Securitization Year-End Cleanup Matters for REITs and Investment Funds

If a REIT or Investment Fund directly (or indirectly through a tax-disregarded entity such as a QRS or wholly-owned LLC) securitized mortgage loans in a REMIC securitization in 2016, the REIT or Fund may have prohibited transaction tax issues or US trade/business tax issues, respectively. There may still be time in 2016 to fix the problem; in 2017 it may be too late. Contact me today to vet the issues, discuss possible solutions, and institute strategic controls for the future.

 

Thanks!

—Todd—

Todd S. Anderson
Direct Dial: 646-942-0311
Website: http://andersontaxandfinance.com/
Bio: http://andersontaxandfinance.com/attorney-profile/

andersonsm
61 Massachusetts Avenue, PO Box 205, Hyannis Port, MA 02647

 

Loan Servicing Rights & Material Tax Savings

Energy cannot be created or destroyed, it can only be changed from one form to another.” – Albert Einstein

 

Sophisticated tax structuring of loan servicing rights may save investors millions. How?

Hypothetical and Simplified Assumptions:

  • An investment fund is planning to acquire mortgage servicing rights (MSRs) on a pool of loans with an unpaid principal balance of $10 billion.
  • The fund’s allocations and distributions to investors are straight-up.
  • 50% of the fund’s capital is committed by non-US investors.
  • 25% of the fund’s capital is committed by US tax-exempt investors.
  • 25% of the fund’s capital is committed by US taxable investors.
  • The MSRs entitle the fund to 35 basis points of servicing compensation.
  • The fund hires a servicer to service the loans for 25 basis points.
  • The fund’s US tax-exempt investors are subject to US federal income tax at a rate of 35% on unrelated trade or business income.
  • The fund’s non-US investors do not benefit from an income tax treaty and are subject to US federal income tax (including branch profits tax) at an effective rate of 54.5%.

Option 1: The fund may acquire the MSRs into a wholly-owned entity that is disregarded for US federal income tax purposes. If the fund earns approximately $10 million net servicing revenue ($10 billion * 10 basis points) in the first year, then the total unnecessary US federal income tax drag from this structure in the first year may be $3.6 million [($10 million * 50% * 54.5%) + ($10 million * 25% * 35%)]. This Option 1 may also trigger US federal income tax return filing obligations for the fund’s US tax-exempt investors and non-US investors.

Option 2: The fund may acquire the MSRs into a “blocker” corporation. This structure will obviate the need for the fund’s US tax exempt investors and non-US investors to file US federal income tax returns; however, the total unnecessary US federal income tax drag from this structure in the first year may be $4.475 million [the $3.6 million drag calculated in Option 1 plus ($10 million * 25% * 35%)].

Option 3: The fund may structure the MSR acquisition as an acquisition of two assets: MSRs and a series of 10 basis point “interest-only strips” off the underlying loans. The fund may acquire the MSRs into a “blocker” corporation that operates at or near break-even; and the fund may acquire the series of 10 basis point “interest-only strips” into a subsidiary grantor trust. The total unnecessary US federal income tax drag from this structure is $0. In addition, this structure will obviate the need for the fund’s US tax exempt investors and non-US investors to file US federal income tax returns.

 Summary: A sophisticated tax structurer is worth her weight in gold. There are a number of “traps for the unwary” when implementing these structures that I would be happy to discuss anytime 24/7. Should you have any questions, please pick up the phone and call me.

Thanks!

–Todd–

Todd S. Anderson
Direct Dial: 646-942-0311
Website: http://andersontaxandfinance.com/
Bio: http://andersontaxandfinance.com/attorney-profile/

andersonsm
61 Massachusetts Avenue, PO Box 205, Hyannis Port, MA 02647

Distressed Mortgages and REO – REMICs and Grantor Trusts and REO Corporations. Oh My!

Toto, I’ve a feeling we’re not in Kansas anymore.” — Dorothy, The Wizard of Oz (1939)

 

One of the challenges – which on its face appears to present impossible hurdles – of tax attorneys structuring securitization and asset acquisition vehicles over the past decade has been to structure a static pool of distressed mortgages and REO for the purpose of attracting offshore, tax-exempt, and investment fund purchasers.

 

A number of people called me to ask how this can be done after reading the last article that I posted:

NPLs, Taxes and Your IRS Partner – 6 Q&As (in Plain English),” which you may find at:

https://www.linkedin.com/pulse/npls-taxes-your-irs-partner-6-qas-plain-english-todd-anderson?trk=prof-post

 

Below are 6 Q&A summaries of some of those conversations:

 1.  Why isn’t there a one-size-fits-all investment structure? This is a good question. In very general terms, it’s because different investors have different US federal income tax sensitivities with respect to different assets and activities. For example, a US investment fund with only US taxable investors that wants to purchase, workout and hold long-term a static pool of distressed mortgages and REO may purchase the pool directly into the fund generally without creating any material adverse US federal income tax consequences to its investors. However, the same is not true for an investment fund with tax-exempt and non-US investors. If the fund has tax-exempt and non-US investors, the fund is best advised to triple check the representations and covenants that it made to its investors as it relates to UBTI, UDFI, FIRPTA and ECI, and understand the parade of US federal income tax horribles that may arise for those investors from making a similar unstructured investment. Failure to do so will most likely irreparably damage investor relationships.

2.  If I were to purchase a pool and market it for sale to investment funds and offshore investors, could you structure and opine on the purchasing vehicle for me? Absolutely – BUT only if you put me on the phone with your potential purchaser (or its tax attorney) first so that I can evaluate its tax sensitivities and determine what structuring, if any, is necessary at the asset acquisition level. Many funds and offshore investors have pre-existing structures in place to deal with purchasing “US trade or business” or “FIRPTA” assets. If there’s no time – or no willingness – to put me on the phone with the potential purchaser (or its tax attorney) before completing the trade, then I generally recommend acquiring the pool into a wholly-owned trust or other state law entity that is not a c-corporation, so that the acquiring entity may be “disregarded” for US federal income tax purposes.

3.  How do you devise the most efficient and effective investment structure? In very general terms, I deconstruct the pool by segregating the pool assets (both current and foreseeable) and pool activities (both current and foreseeable) into buckets based in part on their functional independence and tax implications to particular investors. I then construct the simplest structure possible that minimizes tax drag and addresses investors’ tax sensitivities, legal sensitivities, and economic and other business concerns. My tax work, however, doesn’t always stop at structuring. If necessary, I’ll establish operational guidelines to address any material tax issues that may foreseeably arise, for example, from financing or the movement of assets or cashflow throughout the structure. Asset managers with experience in CDOs and CLOs are no strangers to these types of guidelines.

4.  Is this how the REMICs, grantor trusts and REO corporations investment structure sprang into existence for investment funds? One of the more complex investment structures that an investment fund with tax-exempt investors and non-US investors may utilize for a pool of distressed mortgages and REO consists of a combination of one or more REMICs, grantor trusts and REO corporations. This structure evolved into existence over the past decade, and did not spring into existence overnight. There are a number of “traps for the unwary” inherent in the structure and its ongoing maintenance, so it’s very important to work with tax attorneys knowledgeable about its intricacies prior to setting the structure into motion.

5.  How does the REMICs, grantor trusts and REO corporations investment structure generally work? Below is a summary in very general terms of the deconstruction/construction methodology that I mentioned above in Q&A 3.

I prefer to segregate the pool assets into the following buckets and analyze them in turn: (a) performing loans, (b) reperforming loans, (c) distressed loans at varying levels of distress and (d) REO.

(a) Performing loans. A static pool of performing loans generally is the least problematic of the bucketed assets from an investor’s standpoint. Acquiring the performing loans into a grantor trust places the loans into “registered form.” It creates no US federal income tax drag; and unlike a REMIC, the grantor trust may periodically sell the loans that it owns.

(b) Reperforming loans. A static pool of reperforming loans generally is not problematic from an investor’s standpoint. Acquiring the reperforming loans into a grantor trust places the loans into “registered form.” It creates no US federal income tax drag; and unlike a REMIC, the grantor trust may periodically sell the loans that it owns.

(c) Distressed loans at varying levels of distress. Distressed loans present a number of US federal income tax concerns to tax-exempt and non-US investors. I generally recommend against using a grantor trust to acquire distressed loans. Distressed loans at varying levels of distress may be included in either a REMIC or an REO corporation, depending in part on their REMIC eligibility and imminence to foreclosure. Accordingly, I may bucket these loans into sub-buckets – those that are REMIC-eligible, and those that are suitable only for an REO corporation.

(d) REO. REO presents a number of US federal income tax concerns to non-US investors, and possibly also to tax-exempt investors depending on the particular circumstances. I generally recommend that a non-US investor’s (and possibly a tax-exempt investor’s) direct or indirect interest in REO be owned through one or more REO corporations. More complex structures are also possible.

A newly created “parent” investment vehicle may take ownership of the grantor trusts, REO corporations, and some (or all) of the REMIC regular interests. Within limits, the “parent” investment vehicle may issue various classes of debt and equity.

6.  Why does this structure work and what are the “traps for the unwary” that you mentioned above? Pick up the phone and call me – I’m happy to answer any questions that you may have. This isn’t an intuitive area, and there are no stupid questions. You likely won’t find the answers to your questions spelled out in any investment documents or elsewhere online. With your permission, I may include your question in future Q&As.

Thanks!

–Todd–

Todd S. Anderson
Direct Dial: 646-942-0311
Website: http://andersontaxandfinance.com/
Bio: http://andersontaxandfinance.com/attorney-profile/

andersonsm
61 Massachusetts Avenue, PO Box 205, Hyannis Port, MA 02647

NPLs, Taxes and Your IRS Partner – 6 Q&As (in Plain English)

An ounce of prevention is worth a pound of cure.” – Benjamin Franklin

  1. Purchasing an NPL pool – do I need to worry about the IRS? Yes. Whether you like it or not, the IRS is one of your economic partners in the trade. Structuring the acquisition, ownership, financing, securitization and/or disposition of an NPL pool requires at least as much of your attention as negotiating economic terms with your business partners. Listening to your tax advisors may put you to sleep, but you’ll sleep soundly knowing they put money into your pocket.
  1. Why do I need to worry about the IRS? The IRS’s share of your economic profits depends in part on the assets you own, the activities you conduct and your tax status (and possibly the tax status of your investors). The IRS’s share may be significant. For example, the IRS’s share of profits from an NPL pool owned by a non-US corporation may rise to 54.5%. Think about that for a second – if the NPL pool generates $1M net income, the IRS may take $545,000 and the non-US corporation may take only $455,000. Therein lies the value for creating a tax-efficient structure.
  1. What investors have the most tax sensitivities? Investors with the most tax sensitivities for an NPL investment include non-US investors, tax-exempt organizations (including pension funds), REITs, and investment funds with any of these types of investors.
  1. What tax sensitivities do these investors have? Ownership and active management of an NPL pool may cause the owners of the NPL pool to be engaged in a lending or financing business. In very general terms, this may trigger tax liability for non-US investors, tax-exempt organizations (including pension funds), and REITs investing directly in the NPL pool or indirectly through an investment fund. In addition, ownership and active management of an NPL pool may cause these non-US investors and tax-exempt organizations (including pension funds) to file US federal income tax returns when they may not otherwise be required to do so. In other words, anonymity may be lost for non-US investors. REITs may have additional tax issues, such as phantom income, liquidity and difficulty meeting REIT distribution requirements.
  1. Do you have a silver-bullet one-size-fits-all investment structure? No. For example, you wouldn’t want to drop an NPL pool into a US “blocker” corporation that is owned equally by non-US investors and taxable US investors. Sure, the US corporation would help solve the “anonymity” problem for non-US investors that I mentioned above; however, running the taxable US investors’ share of profits from the NPL pool though the corporation (taxed at a 35% US federal income tax rate) unnecessarily reduces their after-tax return. Don’t be the one who makes this mistake.
  1. What will you do for me? Pick up the phone and call me. I’m intimately familiar with marketplace trends as well as the myriad unique tax issues raised by NPL pool acquisition, ownership, financing, securitization and disposition by tax-sensitive investors. I’ll design a bespoke investment structure tailored to your unique investment strategy to minimize – and possibly eliminate – the unnecessary costs of your IRS partner.

Thanks!

–Todd–

Todd S. Anderson
Direct Dial: 646-942-0311
Website: http://andersontaxandfinance.com/
Bio: http://andersontaxandfinance.com/attorney-profile/

andersonsm
61 Massachusetts Avenue, PO Box 205, Hyannis Port, MA 02647

 

A Welcome Message from the Desk of Todd Anderson…

Thank you very much for visiting our website, and welcome to Anderson Tax & Finance Law, LLC.

I am humbled and grateful for the extraordinary support, enthusiasm and encouragement of my family, friends, clients and industry colleagues throughout my career spanning more than 18 years and during the months leading up to our official launch.  Without your support, enthusiasm and encouragement, Anderson Tax & Finance Law would not be possible.

Today is an exciting time for the financial industry and the legal community that supports it.  The unprecedented challenges, regulatory uncertainty and market volatility require industry leaders and market participants to rethink and reinvent “business as usual.”  The economics and structures of deals are changing.  Deal risks must be addressed, managed and mitigated more than ever before.

Anderson Tax & Finance Law – boasting one of the very few seasoned structured finance tax lawyers with extensive investment fund, REIT, REMIC, real estate and mortgage experience in the industry – has 100% of the tax tools that clients need in this environment to develop new platforms, ventures, structures and procedures to drive economics and manage and mitigate risk.

Our mission at Anderson Tax & Finance Law is to deliver best-in-class legal service, on time, for a reasonable price.  In this vein, we are happy to serve you in any capacity, and will happily team with other law firms to meet your special needs.

We welcome and urge all industry participants, including other lawyers and law firms, seeking our specialized tax expertise to pick up the telephone and call us today.

Let’s work together to create opportunity out of all of today’s challenges, uncertainty and volatility.

Thanks!

–Todd–

Todd S. Anderson
Direct Dial: 646-942-0311
Website: http://andersontaxandfinance.com/
Bio: http://andersontaxandfinance.com/attorney-profile/

andersonsm
61 Massachusetts Avenue, PO Box 205, Hyannis Port, MA 02647