Example 1. REO property is a portion (vacant retail box plus in-line shops) of a regional shopping center. Special servicer has been approached by a national retailer to purchase the vacant box leaving the REMIC with the in-line space as the remaining foreclosure property. Can the REMIC sell part (the big box) but not all of the REO property to this potential buyer?

Answer: Probably under these facts. As a general rule, REMICs cannot engage in trade or business with REO property (other than through an independent contractor). This restriction can prevent a REMIC from developing an REO property in an otherwise commercially reasonable manner. What’s more, should a REMIC conduct several partial sales of a single REO property the REMIC can, under some circumstances and as a result of this sales activity, be deemed to engage in an impermissible trade or business.

Assessing whether a REMIC is engaged in an impermissible trade or business as a result of multiple sales of parts of a single REO property is a facts-and-circumstances test. ¹ The following factors should be considered when assessing whether a REMIC has engaged in the trade or business of developing an REO property:

• Reason for Multiple Sales: If the REMIC prospectively subdivides the REO property for future multiple sales, the special servicer must assess whether there is a logical reason why different buyers would be interested in different aspects (for instance, when the retail portion of the REO property is separated from the office portion) of the property. If there is a logical reason for prospectively positioning the REO property for multiple sales, the less likely the REMIC will be deemed to be in a trade or business of developing the property.
• Purchasing Party: Where the purchasing party is uniquely suited to acquire some but not all of the REO property, it is less likely the REMIC will be deemed to be engaged in the trade or business of developing the property as a result of a partial sale of the property. This would be the case where, for example, an existing (non-borrower) tenant at the REO property (e.g., an operator of a movie theatre, bowling alley, etc.) wants to purchase the space that it occupies but not the entire REO property.
• Number of Sales and Preparatory Work: The more sales a REMIC has with respect to a single REO property, the more likely the REMIC will be engaging in an impermissible trade or business with that property. Similarly, the more preparatory work in which the REMIC must engage to accommodate multiple sales for a single REO property (signage, tax parcel, site plan, access, utilities, etc.), the more likely the REMIC will be deemed to be in the trade or business of developing the property.
• Marketing and Appearance: In order to be engaged in a trade or business, the REMIC must be engaged in an activity on a regular basis. To the extent that the REMIC: (a) holds itself out as a developer, (b) is willing and able to subdivide the existing REO property to accommodate multiple potential buyers, and (c) otherwise gives the appearance as a party that is actively developing the REO property, the more likely the REMIC will be deemed to be in the trade or business of developing the property.

In this example, as the prospective buyer approached the REMIC to purchase the vacant retail box and the REMIC did not otherwise hold itself out to be in the trade or business of developing this property, we do not believe that a single partial sale of the REO property to the retailer would result in the REMIC being engaged in the trade or business of developing the property. This result can change, however, should the REMIC engage in subsequent partial sales of this property or otherwise holds itself out as being in the trade or business of developing this property.

¹ See Kilpatrick Townsend, Servicer Survival Guide 2019-2020 Edition, Tom Biafore and Steve Edwards “The Dos and Don’ts of REO: Prohibitions on Trade or Business and New Construction” for a detailed discussion of prohibition on trade or business activity with REO.