Introduction to the Bondable Lease


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Powerpoint slides of a presentation I originally gave in January 2010 at a Federated Press Seminar as an introduction to the bondable or credit tenant lease, as translated for representation in January 2010

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Introduction to the Bondable Lease

  1. 1. Introduction to the « Bondable Lease » Philipp Duffy March 23, 2010
  2. 2. <ul><li>What is a « Bondable Lease », </li></ul><ul><li>«Credit Tenant Lease » </li></ul><ul><li>or « Hell or High Water Lease » </li></ul>
  3. 3. Introduction <ul><li>What is a « Bondable Lease »? </li></ul><ul><li>Net net net typically longer term lease </li></ul><ul><li>Granted to tenants with a superior credit rating </li></ul><ul><li>Presenting a reduced risk/responsibility profile for the landlord: </li></ul><ul><ul><ul><li>greater assumption of responsibility for tenant </li></ul></ul></ul><ul><ul><ul><li>insurance </li></ul></ul></ul><ul><li>Central document to a financing structure </li></ul>
  4. 4. Introduction <ul><li>What is a « Bondable Lease » (2) </li></ul><ul><li>Generates income stream necessary to repay loan evidenced by commercial paper or other securities </li></ul><ul><li>Allows financing to benefit from tenant’s credit rating </li></ul>
  5. 5. Overview <ul><li>Typical structure of the financing </li></ul><ul><li>Advantages of the bondable lease financing model </li></ul><ul><li>Particular attributes of the bondable lease </li></ul>
  6. 6. Typical Financing Structure Owner Property Manager Tenant Bondholders Special Purpose Vehicle Trustee Rental Stream Assignment of Lease Lease Mortgage / Pledge Periodic Payments (rents) Prepayment of Net Rent $
  7. 7. Typical Financing Structure (2) <ul><li>Owner is responsible for any landlord obligations (not the SPV) </li></ul><ul><li>SPV must be bankruptcy remote from owner </li></ul><ul><li>May or may not provide for real security or guarantee by the owner </li></ul>
  8. 8. Typical Financing Structure (3) <ul><li>May include multiple tenants, but credit rating may be dependant on only selected tenant(s) </li></ul><ul><li>Typically provides for full amortization of the paper within term of the lease </li></ul>
  9. 9. Typical Financing Structure (4) <ul><li>Rentals under the lease must fully satisfy: </li></ul><ul><ul><li>scheduled payments to the bondholders </li></ul></ul><ul><ul><li>opex, taxes, and all other costs relating to the property </li></ul></ul><ul><li>Rent payments should coincide with payments to bondholders </li></ul><ul><li>Operating expenses are generally assumed by tenant </li></ul>
  10. 10. Typical Financing Structure (5) <ul><li>Bonds created benefit from tenant ' s credit rating, without regard to landlord ' s solvency or value of the real property </li></ul>
  11. 11. Typical Financing Structure (6) <ul><li>Who uses the bondable lease?: </li></ul><ul><ul><li>Landlords whose tenants have credit ratings of BBB-/Baa3 or better </li></ul></ul><ul><ul><li>Highly rated owners seeking off–balance–sheet financing (through sale-leaseback) </li></ul></ul><ul><ul><li>« Build to suit » developers </li></ul></ul>
  12. 12. Typical Financing Structure (7) <ul><li>Examples of bondable lease projects: </li></ul><ul><ul><li>Royal Bank/Symcor portfolio </li></ul></ul><ul><ul><li>Bell Mobility Campus Mississauga </li></ul></ul><ul><ul><li>600 de la Gauchetière O. (National Bank) </li></ul></ul><ul><li>Much more common in the U.S.: </li></ul><ul><ul><li>Walgreens, CVS, Home Depot, Wal-Mart, Williams-Sonoma, Bed Bath et Beyond </li></ul></ul><ul><ul><li>Even hospitals and university facilities </li></ul></ul>
  13. 13. Typical Financing Structure (8) <ul><li>Who are typical bondholders? </li></ul><ul><li>Usually subscribed by way of private placement by: </li></ul><ul><ul><li>insurance companies </li></ul></ul><ul><ul><li>pension funds </li></ul></ul><ul><ul><li>institutional investors </li></ul></ul>
  14. 14. Advantages of the Model <ul><li>Underwriting criteria are similar to those applicable to commercial paper, not real estate lending </li></ul><ul><ul><li>speed </li></ul></ul><ul><ul><li>low DSCR, typically 1,00 to 1,05 </li></ul></ul><ul><ul><li>high leverage: placements have reflected 100 % of the value of real estate </li></ul></ul>
  15. 15. Advantages of the Model (2) <ul><li>Lower cost of funds </li></ul><ul><li>Lower fees </li></ul><ul><li>Ability to create very long term (20 to 25 years) fixed rate debt </li></ul>
  16. 16. Particular Attributes <ul><li>Fundamental Principles: </li></ul><ul><li>Reduction of landlord obligations </li></ul><ul><li>Mitigation of risk through use of insurance and other techniques </li></ul>
  17. 17. Particular Attributes (2) <ul><li>Triple net and carefree lease </li></ul><ul><li>Absence of rights of early termination in favour of tenant </li></ul>
  18. 18. Particular Attributes (3) <ul><li>Net Lease : </li></ul><ul><li>Absence/exclusion of ongoing landlord obligations </li></ul><ul><li>Expansive definition of operating expenses </li></ul><ul><li>All repairs, including structural repairs, to be at tenant 's cost </li></ul><ul><li>Possibility of assignment of warranties </li></ul>
  19. 19. Particular Attributes (4) <ul><li>Net lease : </li></ul><ul><li>Landlord may require certain controls (maintenance plan, approval of contractors, maintenance budget) </li></ul><ul><li>Obligation to rebuild </li></ul><ul><li>Limited rights of termination on damage or destruction </li></ul><ul><ul><li>typically only in waning years of the lease </li></ul></ul>
  20. 20. Particular Attributes (5) <ul><li>Insurance : </li></ul><ul><li>Policies must include bondholder trustee as an insured </li></ul><ul><li>Usual tenant insurance, including tenant property and leasehold improvements </li></ul><ul><li>Rental insurance </li></ul><ul><li>Casualty insurance for full replacement value and never less than outstanding loan amount </li></ul><ul><li>Environmental insurance </li></ul><ul><li>Builder's risk insurance </li></ul>
  21. 21. Particular Attributes (6) <ul><li>No right of set-off </li></ul><ul><li>No reduction in rent on damage/destruction except to the extent replaced by insurance </li></ul><ul><li>Expropriation </li></ul><ul><ul><li>case where lease is terminated </li></ul></ul><ul><ul><li>case where lease is not terminated </li></ul></ul>
  22. 22. Particular Attributes (7) <ul><li>Financial covenants (net worth, ratios) </li></ul><ul><li>Reporting obligations </li></ul><ul><li>Yield maintenance where lease is terminated as a result of tenant default? </li></ul>
  23. 23. Particular Attributes (8) <ul><li>No novation on assignment </li></ul><ul><li>Estoppel certificate </li></ul><ul><li>Attornment to bondholder security, if applicable </li></ul><ul><li>Limited recourse to landlord (i.e « REIT » style clause) </li></ul>
  24. 24. <ul><li>Conclusion </li></ul>
  25. 25. Questions?