Issuing bonds for real estate financing?

Forgive me for this isn't thoroughly thought out, but would it be reasonable for properties to issue bonds for financing? Ever? I was reading that LLCs cannot issue stocks, but they can issue bonds. Would a bank ever go for this (ie, not lend on the property, but raise/sell bonds for it)? Am I a complete idiot? Why or why not?

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Comments (18)

Jan 4, 2019

I have thought the same myself - seems like it would make a lot of sense in some cases.
I was at a conference the past summer and the keynote was the CEO of a REIT which went public in 2013. They thought that, at the time, they had the upper-hand in the market as they had raised a load of 'debt-free' cash when lots of banks weren't keen to lend. After a few months he realised that a lot of the major REPE firms could raise really cheap cash through the debt markets. So essentially, I think some firms do but they would have to be very well renowned (Blackstone Property Partners Europe issued EU600m through bonds at 1.4%)

Jan 4, 2019

Check out what All Year Management has done with the Tel Aviv Stock Exchange. Started with his $166M bond offering on the William Value hotel in 2017. Other have followed - mainly from the NYC Jewish community.

We saw this in the 1920's on US exchanges as well.

Jan 7, 2019
Jan 4, 2019

Most malls and huge community RE developments had bonds tied up with them.

Jan 4, 2019

You could totally issue bonds to finance properties, IF you're an established entity. You would have to go to the capital markets, and enter into a form of lease revenue financing. However, if you're small time it'll be too costly and it may be impossible to find a banker that would structure the deal. You'll have to pay for costs of issuance, underwriters discount, ratings (you could opt out but you'll get stupid shitty levels otherwise), bond counsel...the list goes on. Honestly it'd be more worth your time to borrow from the private markets. Now if you have some actual capital and properties, along with a solid track record as a company it could be worth your time. I've been on more than a few senior living transactions, and they issue bonds to acquire properties all the time.

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Jan 5, 2019

That's all really interesting, thanks everyone for the comments. I figured that large scale would be required for not only the ancillary costs but also for bond investors to consider purchasing the securities. Where do you all get your RE financing news?

Most Helpful
Jan 5, 2019

Bonds are issued as a matter of course in 4% LIHTC deals.

    • 2
Jan 5, 2019

check out military housing financing - they use bonds all the time...also utilize lender rep's, etc.

Jan 5, 2019

SASB Cmbs

Jan 6, 2019

It happens all the time on affordable deals. Bonds are issued (by a municipal entity, generally, which I guess is the difference to your questions) to support the construction of a project.

In general, I would imagine it's not that easy or worthwhile. Think about the scale needed for it to make sense. My guess is the financing costs on bonds far outstrips that of a conventional mortgage. I can also imagine that lenders, which generally are the same companies that are helping to issue and sell bonds, are more keen on the idea of a senior mortgage than a bond deal.

Jan 6, 2019

I've been wondering about this - if a property is financed with bonds, what happens if the borrower defaults? Are the bonds secured by the property and if so, who manages the foreclosure/sale process?

Jan 6, 2019

Generally speaking, yes bonds would be secured by real estate, leases, tax credits, etc. In the event of default, a predetermined trustee would represent bondholders collectively. The trustee would most likely tap a property manager to handle the day-to-day while working to find a buyer to repay bondholders.

Jan 6, 2019

Typically bond issuers, say Citibank, would seek credit enhancements from GSE to guarantee the senior bond. So even if the borrower defaults, senior bond holder will have no loss

Jan 6, 2019

What's GSE?

Also, come to think of it, bondholders can probably purchase a CDO, i.e. an insurance policy to protect against default.

Jan 4, 2019

Typically in this type of issue, the indenture will state a minimum debt service reserve requirement AND the leased premise must be on parity with the par value of the bonds of issued. So in the case of default, investors have rights to the debt service reserve fund and the value of the property. If the par value of the bond issue is not on parity with propert value ( Or in the neighborhood of), basically no one will buy the bonds because they know in the case of default they won't get their money back.

Jan 6, 2019

I have seen certain development deals that warranted some investment/involvement from the city and have thereby been able to be financed through muni bonds

Jan 7, 2019

I work in 'CTL' financing (credit tenant lease) which is essentially the financing of properties via private placement bonds. The key for a CTL though is having a lease in place with an investment grade tenant, which drives the 'credit' of the bond / solves a big issue with the above problems discussed. If properly structured and meeting certain criteria these bonds are eligible for schedule D treatment, so you see a lot of insurance companies primarily as the purchasers.

The product IS more expensive on the transaction cost side, but we don't have the leverage constraints of a standard bank loan so can potentially be in the 85-100% LTV range presuming the lease provides enough NOI to justify the loan amount. Can also see savings on the rate, since it's a function of where the tenant trades on the capital markets.