OWNERS

Owners use various enhancement products to either improve the terms of the underlying transaction. An example would be where there is a property that is triple net leased except the tenant may terminate or abate rent (operating lease) due to a eminent domain taking: physical damage to the improvements: or environmental damage, which is not caused by the tenant. The enhancements policies which can fill the wholes in the lease include; 

  • The Lease Enhancement Policy, which will continue the rental stream in the case of a termination due to condemnation or a casualty and cover the short fall in the case of permanent abatement due to the inability to use some part of the property due to the condemnation or casualty.
  • Environmental Insurance Coverage will provide funds to clean up environmental damage and protect against law suits from third parties who alleges they suffered damages due to the environmental condition on the property

Owners purchase some of these products to maximize the loan proceeds from a property or alternatively increase the free cash flow from the rental stream, by obtaining a loan at more favorable terms including lower interest rates and/or the amortization schedule is longer then the length of the lease. The residual value products is one of those products that accomplishes the aforementioned result by guaranteeing the balloon amount of the mortgage when it matures at the end of the lease term.

LENDERS

Lenders require the various enhancement products to qualify mortgages and loans for rating by the rating agencies e.g. Moody, S&P, and Fitch, since the rating agencies do not want market risk. The rating agencies are analyzing credit risk. The Lease Enhancement Policy enables an operating lease to be converted to a bond lease, if condemnation and casualty are the only conditions that permit an interruption of the rental payments by the tenant.

Lenders by requiring various enhancements may be able to increase the spread between the rate charged under the loan documents and what the loan(s) can be sold for in the capital markets or private placements. 

The benefits of the products include:

  • Increased liquidity
  • Higher transaction yields
  • Structural transaction enhancements
  • Create securitization loss protection

©2016 International Amalgamated Group |