Example 2. Under the facts from Example 1, assume the REMIC sells just the retail box portion of the REO property to the retailer. Can the REMIC retain a right to repurchase the retail box should the buyer fail to open and operate in this space?
Answer: Probably, but subject to some conditions about which the special servicer must be aware. Remember, a REMIC can’t acquire an interest in real property other than as a result of the borrower’s default or imminent default on the borrower’s loan. 1 Under these facts, the REMIC holds all of the rights with respect to the big box portion of the REO property prior to the sale, so the REMIC can sell these rights subject to a retained repurchase option without being deemed to hold a new and greater interest in real property in the form of the repurchase option.
In this example, and as distinguished from a situation where the REMIC obtains a purchase option on an entirely unrelated portion of the shopping center that never comprised the REMIC’s REO property (which would not be permitted), the REMIC is merely retaining a portion (the repurchase right) of a property that the REMIC already owns entirely (the big box portion of the REO property).
Note, however, that the special servicer cannot exercise the repurchase right during the time in which the REMIC holds the REO property as the REMIC would be converting the repurchase right into a new interest in real property (the direct fee ownership of the big box). In effect, all the REMIC can do is pass the repurchase right along to a buyer of the REO property at the time the REMIC disposes of 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 the basis by which a REMIC can acquire interests in real property.
