In a notice to the Irish Stock Exchange yesterday it was disclosed that the U.K. tax authorities have notified the property managers of six of the nine properties in the WTOW 06-3 CMBS collateral pool that a 22% withholding tax will now be incurred.
Barclays Capital analysts said that this decision immediately reduces available funds from the properties, albeit leaving sufficient cash to cover interest on the CMBS bonds.
The full extent of the withholding tax problem is unclear since any excess tax withheld during the year should be released at year-end. CBRE has retained legal counsel and auditors to review the issue, which will increase senior costs on the transaction. Also, the ultimate tax liabilities will unlikely be covered by group companies, given the status of the ultimate sponsor.
“This means CMBS bondholders could potentially suffer a bigger loss, due to tax liabilities, than otherwise would have been the case,”Barclays analysts said. “This could be very disturbing news for CMBS investors in general. Since the situation raises concerns for other CMBS transactions, investors now might need to more fully understand the tax structure of the borrowers and how an adverse change in tax treatment can be triggered. “
The notice was posted on the same day that the special servicer scheduled a conference call for bondholders.