A bondable lease, also known as a credit tenant lease or hell or high water lease, is a long-term commercial lease granted to a tenant with a strong credit rating that generates a stable income stream to repay bonds. The lease transfers responsibilities from the landlord to the tenant through a triple net structure. This allows a special purpose vehicle to finance the property through bond issuances backed by the tenant's credit instead of the underlying real estate asset. Typical bondable leases have terms of 20-25 years and include provisions to mitigate risk for bondholders such as mandatory insurance policies and restrictions on the tenant's early termination rights.

1. Introduction to the « Bondable Lease » Philipp Duffy March 23, 2010

2. What is a « Bondable Lease », «Credit Tenant Lease » or « Hell or High Water Lease »

3. Introduction What is a « Bondable Lease »? Net net net typically longer term lease Granted to tenants with a superior credit rating Presenting a reduced risk/responsibility profile for the landlord: greater assumption of responsibility for tenant insurance Central document to a financing structure

4. Introduction What is a « Bondable Lease » (2) Generates income stream necessary to repay loan evidenced by commercial paper or other securities Allows financing to benefit from tenant’s credit rating

5. Overview Typical structure of the financing Advantages of the bondable lease financing model Particular attributes of the bondable lease

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. Typical Financing Structure (2) Owner is responsible for any landlord obligations (not the SPV) SPV must be bankruptcy remote from owner May or may not provide for real security or guarantee by the owner

8. Typical Financing Structure (3) May include multiple tenants, but credit rating may be dependant on only selected tenant(s) Typically provides for full amortization of the paper within term of the lease

9. Typical Financing Structure (4) Rentals under the lease must fully satisfy: scheduled payments to the bondholders opex, taxes, and all other costs relating to the property Rent payments should coincide with payments to bondholders Operating expenses are generally assumed by tenant

10. Typical Financing Structure (5) Bonds created benefit from tenant ' s credit rating, without regard to landlord ' s solvency or value of the real property

11. Typical Financing Structure (6) Who uses the bondable lease?: Landlords whose tenants have credit ratings of BBB-/Baa3 or better Highly rated owners seeking off–balance–sheet financing (through sale-leaseback) « Build to suit » developers

12. Typical Financing Structure (7) Examples of bondable lease projects: Royal Bank/Symcor portfolio Bell Mobility Campus Mississauga 600 de la Gauchetière O. (National Bank) Much more common in the U.S.: Walgreens, CVS, Home Depot, Wal-Mart, Williams-Sonoma, Bed Bath et Beyond Even hospitals and university facilities

13. Typical Financing Structure (8) Who are typical bondholders? Usually subscribed by way of private placement by: insurance companies pension funds institutional investors

14. Advantages of the Model Underwriting criteria are similar to those applicable to commercial paper, not real estate lending speed low DSCR, typically 1,00 to 1,05 high leverage: placements have reflected 100 % of the value of real estate

15. Advantages of the Model (2) Lower cost of funds Lower fees Ability to create very long term (20 to 25 years) fixed rate debt

16. Particular Attributes Fundamental Principles: Reduction of landlord obligations Mitigation of risk through use of insurance and other techniques

17. Particular Attributes (2) Triple net and carefree lease Absence of rights of early termination in favour of tenant

18. Particular Attributes (3) Net Lease : Absence/exclusion of ongoing landlord obligations Expansive definition of operating expenses All repairs, including structural repairs, to be at tenant 's cost Possibility of assignment of warranties

19. Particular Attributes (4) Net lease : Landlord may require certain controls (maintenance plan, approval of contractors, maintenance budget) Obligation to rebuild Limited rights of termination on damage or destruction typically only in waning years of the lease

20. Particular Attributes (5) Insurance : Policies must include bondholder trustee as an insured Usual tenant insurance, including tenant property and leasehold improvements Rental insurance Casualty insurance for full replacement value and never less than outstanding loan amount Environmental insurance Builder's risk insurance

21. Particular Attributes (6) No right of set-off No reduction in rent on damage/destruction except to the extent replaced by insurance Expropriation case where lease is terminated case where lease is not terminated

22. Particular Attributes (7) Financial covenants (net worth, ratios) Reporting obligations Yield maintenance where lease is terminated as a result of tenant default?

23. Particular Attributes (8) No novation on assignment Estoppel certificate Attornment to bondholder security, if applicable Limited recourse to landlord (i.e « REIT » style clause)

24. Conclusion

25. Questions?