SECTION 5. EFFECTIVE DATE

This revenue procedure is effective August 11, 2003.

DRAFTING INFORMATION

The principal author of this revenue procedure is Eric E. Boody of the Office of Associate Chief Counsel (Financial Institutions and Products). For further information regarding this revenue procedure, contact Mr. Boody at (202) 622–3960 (not a toll-free call).

claims of other creditors of the partner or LLC member. The pledged ownership interest cannot be further encumbered unless the security interest created is subordinate to the lender's security interest.

.04 Upon default and foreclosure on the secured loan, the lender will replace the borrower as a partner in the partnership or as the sole member of the disregarded entity. In the case of a loan secured by a partnership interest, the other partners in the partnership must have agreed that upon default and foreclosure they will not unreasonably oppose the admission of the lender as a partner.

.05 On the date the commitment by the lender to make the loan becomes binding on the lender, the partnership or disregarded entity holds real property within the meaning of § 1.856–3(d). If all or part of this real property is subsequently sold or otherwise transferred, the loan will become due and payable upon the sale or transfer of the real property.

.06 On each testing date, the value of the real property (within the meaning of § 1.856–3(d)) held by the partnership or disregarded entity is at least 85 percent of the value of all of the assets of the partnership or disregarded entity. For this purpose a testing date means the close of the first quarter of the lender's taxable year following the date on which the commitment by

the lender to make the loan becomes binding on the lender, and the close of each subsequent quarter in which the partnership or disregarded entity acquires any assets other than real estate assets, cash and cash items (including receivables), or government securities (within the meaning of § 856(c)(4)(A)), or reasonable quantities of equipment and materials customarily used for the maintenance and repair of real property. For this purpose, asset acquisitions by a partnership or disregarded entity include additional partnership or member contributions.

.07 The loan value of the real property owned by the partnership or disregarded entity equals or exceeds the amount of the loan as determined under § 1.856–5(c)(2). For this purpose, the loan value is reduced by any liens encumbering the real property, as well as by any other liabilities of the partnership or disregarded entity on the date the commitment by the lender to make the loan becomes binding on the lender. If the real property is owned by a partnership, only the proportionate share of the loan value (determined using the principles of § 1.856–3(g)) attributable to the interest that secures the lender's loan is taken into account.

.08 Interest on the loan meets the requirements of §§ 1.856–5(a) and (b); thus, the interest includes only an amount that

2003-32 I.R.B. 337 August 11, 2003