Can We Do This?
Hey all,
Is there anything that says we cannot extract a Commercial Defeasance clause from a contract and use it as a type of 100% commercial financing tool?
The objective would be to bring in investors, and purchase treasuries to cover the debt service. Additionally, the treasuries could be used as collateral to replace the property as collateral.
Just a though I had last night.
Would explain this a little more?
It seems like cash is being created out of no where.
The real estate security for the loan is released from the lien and replaced with U.S government obligations. Its secured by the U.S. Treasuries making it less risky.
[ Edited by waterfront on Date 05/25/2004 ]
I was trying to think of a way to use this clause independently upfront and package it to raise capital; covering the standard 20 to 30% for commercial loans (like a stand alone 2nd); or raise enough to cover 100% and have the debt service covered. The
I know it seems like the long road but its creative and removes any risk
You may want to look into loans made by brokerage/ investment banks using securities as collateral. For instance, Merrill Lynch will loan you money if you hold securities with them. I am not sure of the LTV.
-AE_trading
Well, waterfront (loved your movie by the way),
I see this deal proposed all the time. Usually in the 10 to 50 million dollar range. They never close. I've got a friend in texas who's been waiting for the cash for 7 years now. Usually there is a rich Arab or a Swiss bank supposed to be behind the deal.
That said there is no theoritcal reason it cannot be done (well there is a theoretical reason but no legal one).
The theoretical reason goes like this: The bonds, etc. have a very low rate because they have a very low risk. The real estate deal must have a higher risk and therefore ought to have a higher rate. By combining the two vehicles you get some kind of blended risk and a rate somewhere in between. But every time I see this deal it assumes that the bonds will reduce the real estate rate to something below the bond rate. At that point I alway get really confused as they attempt to explain to me why this is so. . . . .
Thanks for the heads up. I'm pretty new to the commercial side of things. I don't see how blending them together would bring the rates down to under the bond rate. I was thinking a straight forward deal in order to raise the financing. I think just offsetting the monthly payments would be enough.
who buys the t-bills / bonds?
Defeasance that that I have seen is pleging other assets to free up the RE loan.