introduction to the bondable lease
DESCRIPTION
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 2010TRANSCRIPT
Introduction to the « Bondable Lease »
Philipp Duffy
March 23, 2010
What is a « Bondable Lease », W
«Credit Tenant Lease » «
or « Hell or High Water Lease »
IntroductionI
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
IntroductionI
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
Overview
1. Typical structure of the financing– Advantages of the bondable lease financing
model– Particular attributes of the bondable lease
Typical Financing Structure
OwnerProperty
ManagerTenant
Bondholders
Special
Purpose
Vehicle
Trustee
Rental
Stream
Assignment
of Lease
Lease
Mortgage / Pledge
Periodic Payments
(rents)
Prepayment of Net Rent
$
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
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
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
Typical Financing Structure (5)
Bonds created benefit from tenant's credit rating, without regard to landlord's solvency or value of the real property
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
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
Typical Financing Structure (8)
Who are typical bondholders? Usually subscribed by way of private
placement by: insurance companies pension funds institutional investors
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
Advantages of the Model (2)
Lower cost of funds Lower fees Ability to create very long term (20 to 25
years) fixed rate debt
Particular AttributesP
Fundamental Principles: Reduction of landlord obligations Mitigation of risk through use of insurance
and other techniques
Particular Attributes (2)
Triple net and carefree lease Absence of rights of early termination in
favour of tenant
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
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
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
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
Particular Attributes (7)
Financial covenants (net worth, ratios) Reporting obligations Yield maintenance where lease is
terminated as a result of tenant default?
Particular Attributes (8)
No novation on assignment Estoppel certificate Attornment to bondholder security, if
applicable Limited recourse to landlord (i.e « REIT »
style clause)
Conclusion
Questions?