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?