CREFW-Winter2016

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Winter issue 2016 sponsored by CRE Finance World Winter 2016
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Securitization of Tenant Improvement Loans
Tenant improvement loans by their very nature are quite conducive
to securitization, and in fact, have been securitized to date on
about half a dozen or more occasions. Thus far, such securitizations
have been limited to single loan, private placement, Certificates of
Participation (“COP”), although the prospect of 144A offerings is
certainly realistic, given larger single or multiple pooled loans.
Given the longer tenure associated with
tenant improvement loans, long-term
institutional investors, especially life
insurance companies, have an natural
appetite for tenant improvement loan
backed securities (“TIBS”), particularly
those in which the underlying Obligor
is investment grade rated, resulting in
a NAIC designation of 1 or 2. For those
TIBS in which the underlying Obligor is speculative grade rated
or unrated, other long-term institutional investors apart from life
insurers, would more likely be a better fit, particularly those investors
not subject to regulatory capital reserve requirements.
Whether investment grade or not, a TIBS will ultimately be priced
at some reasonable spread above the prevailing level at which
unsecured debt of the underlying Obligor trades, which fairly
compensates the investor for the relative illiquidity of the TIBS
when compared to the underlying Obligor’s unsecured debt.
Clearly, the extent liquidity characterizing the underlying Obligor’s
unsecured debt will impact the illiquidity spread concession.
Notwithstanding the underlying Obligor’s credit rating, or lack thereof,
to the extent the underlying Obligor is a substantial organization
with a perceived rating of B-/B3 or better, the chances of a favorable
TIBS execution relative to alternative sources of debt available to
the underlying Obligor, is quite high. Moreover, the TIBS structure
exploits all the benefits of institutional investor liquidity, while
avoiding characterization of the transaction as debt to the underlying
Obligor. Consequently, TIBS execution can harness all the advantages
of the underlying Obligor’s credit attributes, without inflating the
underlying obligor’s balance sheet. Therefore, TIBS can have
profoundly positive impact on the underlying Obligor’s financial
metrics such as return on equity and return on assets.
The benefits of TIBS, however, are certainly not limited to the
underlying Obligor. The illiquidity concession available to TIBS
investors, is undoubtedly a driving factor motivating such investors to
acquire TIBS, and provides such investors
a means by which to invest in certain
credits at levels not possible elsewhere,
with no material trade-off of any kind with
regard to risk.
Potential Origination Volume
In light of the vastness of the commercial
real estate leasing space, the potential
market for TIBS is substantial. To date, the market potential has
been constrained largely by lack of access of tenants and landlords
to information regarding the benefits of tenant improvement loans.
Arguably, most tenants and landlords are unaware that tenant
improvement loans are actually available to assist them with
managing the challenges of funding their much needed tenant
improvements.
However, as access to information about tenant improvement loans
continues to filter through to tenants and landlords alike, and as
business developers increasingly make it their business to proliferate
this nascent asset class, the incidence with which such opportunities
materialize will undoubtedly grow. Current TIBS volume is estimated
annually at $100-200mm. With increasing education among relevant
stakeholders nearly certain, this asset class is surely poised for
significant growth in years to come.
Scott Sidell, Ph.D. is the C.E.O. of Compo Cove Capital, LLC, who with
its strategic partner Lance Capital, are leading participants in syndicating
tenant improvement financing transactions.
Securitization of Tenant Improvement Loans
“Tenant improvement loans by their
very nature are quite conducive
to securitization, and in fact, have
been securitized to date on about
half a dozen or more occasions.”