An Italian law decree could have, at least temporarily, a negative impact on CMBS activity in the country, according to Standard & Poor's. The rating agency said last week that the fourth of July Law Decree N. 223, which was published in the Italian Official Gazette earlier this month, could affect Italian structured finance transactions which have "considerable" exposure to commercial real estate properties. It would essentially change the way tax is charged on real estate in Italy, and it has many investors up-in-arms, according to news reports.

While the law decree can be modified significantly prior to its actual conversion into law, the decree holds during the 60-day process taken to do so. Because of the changes applicable on trades involving commercial real estate assets, the cost of doing transactions could increase. This would negatively affect supply-and-demand dynamics, according to S&P.

Tax consequences

According to the new decree, real estate sales executed five years after construction or refurbishment of the properties are no longer subject to VAT. Alternatively, a "proportional transfer tax" will be required. That removes the company's ability to offset VAT costs from credits earned through purchasing goods and services that left them "VAT-neutral." Now, the transfer tax paid on commercial property transactions can no longer be recovered using this method - and the transfer tax could increase the property cost for depreciation purposes, the rating agency said.

Adding a special twist, the decree requires that companies - including real estate and leasing companies - that have offset the VAT debits related to CRE transactions made in the past must now rectify those deductions. They may also be required to pay the VAT amounts back. "We consider that tax liabilities arising from the decree could affect certain issuers, borrowers and originators in structured finance transactions," S&P said. This means that higher costs strapped onto CRE originators could be passed on to borrowers, leading to borrower credit problems.

The law is to be voted on in September.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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