SECTION 5. EXAMPLES

.01 Example 1 . In 2007, X, a REIT, made a $100 mortgage loan to A . X ’s loan to A was secured by both real property and personal property. When X ’s commitment to make the loan became binding on X, the real property had a fair market value of $115. At the end of the calendar quarter in which X made the loan, the value of the loan as determined under § 1.856–3(a) was $100. At all times through the end of 2010, under § 1.856–5(c)(3), the amount of the loan continued to be $100.

By the start of 2009, the fair market value of the real property had fallen to $55 and the fair market value of the personal property was $5. They remained at these levels throughout 2009 and 2010. Throughout 2009 and 2010, the value of the loan, as determined under § 1.856–3(a), was $60.

During 2009, X and A modified the terms of the mortgage loan. The modification of the loan is described in section 3.01 of this revenue procedure and is a significant modification under § 1.1001–3.

(1) Income Test . When X made the mortgage loan in 2007, the loan value of the real property for purposes of § 1.856–5(c) was its fair market value ($115)

determined as of the date on which the commitment to make the loan became binding on X . This amount exceeded the amount of the loan for that year ($100). Accordingly, in the year that the loan was made, all of the interest from the loan was apportioned to the real property. See § 1.856–5(c)(1).

Between the time that the loan was made and the time of the modification, the loan value of the real property continued to be $115, notwithstanding changes in the fair market value of that real property. See § 1.856–5(c)(2). Similarly, the amount of the loan continued to be $100. Accordingly, the loan value of the real property ($115) continued to exceed the amount of the loan ($100), and all of the interest on the loan continued to be apportioned to the real property.

The fair market value of the real property that secured the mortgage loan had fallen to $55 by the time that X and A modified the loan in 2009. That modification, however, is described in section 3.01, and X chose to treat the modification as not being a new commitment to make or purchase a loan. Therefore, the loan value of the real property ($115) does not change. Because the loan value of the real property ($115) continued to exceed the amount of the loan for the year of modification ($100), all of the interest from the loan during that year is apportioned to real property.

(2) Asset Test . In 2007, at the end of the calendar quarter in which X made the mortgage loan, the value of the loan (as determined under § 1.856–3(a)) was $100, and the loan value of the real property securing the loan (as determined under § 1.856–5(c)(2)) was $115. For this calendar quarter, under section 4.02 of this revenue procedure, X may treat the lesser of these two values ($100) as the amount of the loan that is a real estate asset for purposes of section 856(c)(4).

In 2009, at the end of the calendar quarter in which X modified the mortgage loan, the value of the loan (as determined under § 1.856–3(a)) was $60, and the loan value of the real property securing the loan (as determined under § 1.856–5(c) and section 4.01 of this revenue procedure) was $115. For this calendar quarter, under section 4.02 of this revenue procedure, X may treat the lesser of these two values ($60) as the amount of the loan that is a real estate asset for purposes of section 856(c)(4).

.02 Example 2 . The facts include all of the facts in Example 1. Additionally, during the first quarter of 2010, Y, a REIT, committed to purchase, and purchased, the mortgage loan from X for $60.

(1) Income Test . Under § 1.856–5(c)(2), the loan value of the real property securing the loan is the fair market value of the real property determined as of the date on which Y ’s commitment to purchase the loan became binding on Y ($55). This value is compared to the amount of the loan for the year ($100). Because the amount of the loan exceeds the loan value of the real property, the interest income apportioned to the real property is an amount equal to the interest income multiplied by a fraction the numerator of which is the loan value of the real property ($55) and the denominator of which is the amount of the loan ($100). Therefore, 55 percent of the interest income from Y ’s loan is apportioned to the real property securing the loan. Interest income apportioned to the other property is the excess of the total interest income over the interest income apportioned to the real property. See § 1.856–5(c)(2).

(2) Asset Test . At the end of every calendar quarter during 2010, the value of the loan (as determined under § 1.856–3(a)) was $60, and the loan value of the real property securing the loan (as determined under § 1.856–5(c) and this revenue procedure) was $55. For every calendar quarter during 2010, under section 4.02 of this revenue procedure, Y may treat the lesser of these two values ($55) as the amount of the loan that is a real estate asset for purposes of section 856(c)(4).