REICG Debt Model

REI Capital Lending (REICL) has devised a new way to “corporatize” and replace traditional Mortgage Debt for its U.S. Commercial Real Estate Fund.

This new Debt Model is based on the combination of a “Corporate Bond” and a structured “Real Estate Credit Facility”, made possible by the “Portfolio Debt Exception” recorded on the blockchain as a “Security Token Offering” (STO)

 

Watch our 3 min Debt Video

With this Debt STO, REICL can deliver a 5.5% coupon rate with a pay rate of 4.00% interest providing income to global investors, paid quarterly in $U.S. Dollars (or their local currency of choice) and non-U.S. investors will be exempt from the 30% U.S. withholding tax requirements.

What is a Corporate Bond?

The SEC defines a corporate bond as “A debt obligation. Investors who buy corporate bonds are lending money to the company issuing the bond. In return, the company makes a legal commitment to pay interest on the principal and, in most cases, to return the principal when the bond comes due, or matures.”  Like all investments, bonds carry risks. One key risk to a bondholder is that the company may fail to make timely payments of interest or principal, the “Default Risk”.

If a company defaults on its bonds and goes bankrupt, bondholders will have a claim on the company’s [real estate] assets and cash flows. The bond’s terms determine the bond-holder’s place in line, or the priority of the claim.  Priority will be based on whether the bond is, for example, a secured bond, a senior unsecured bond or a junior unsecured (or subordinated) bond.

 

What is a Real Estate “Credit Facility”?

A credit facility is a type of loan or debt strategy that is often used in a business or corporate setting. Many publicly traded REITs will borrow a large pool of money from a bank or a group of banks in the form of a line of credit.  To put it simply, a credit facility is a series of different loans that a company can draw upon, to meet its acquisition financing needs.  A credit facility is more or less a large umbrella loan that a company can draw down when needed over an extended period of time.  This concept is akin to a bank revolving line of credit.

For a Real Estate Investment Company, this form of loan is a replacement for a series of typical mortgage obligations across a portfolio of assets.  It allows the commercial real estate firm ready access to the debt required to acquire properties quickly, without the typical lengthy closing times associated with mortgage financing.  A credit facility agreement will establish “underwriting standards” required for the acquisition of new real estate assets and establishes the cross-collateralization.  For a Lender, it is important to note that the key lending criteria are a combination of the overall property portfolio’s “loan-to value ratio” (LTV) and the “debt service coverage ratio” (DSCR). This means that stronger performing properties have the potential to support weaker performing properties. When the real estate credit facility loan is structured as an “unsecured loan” it will be a “senior unsecured loan” secured by the “unencumbered asset pool” meaning that there are no other debts or mortgages senior to the “Credit Facility”.   In this way in the event of default or bankruptcy the credit facility gets paid first, in the same way a secured first mortgage has priority.

 

What is the “Portfolio Debt Exception”?  And why can REICL pay 4.00% Interest to non-U.S. Investors with no 30% Withholding Tax Requirement?

Because of a relatively obscure IRS exemption called the “Portfolio Debt Exception”, portfolio interest is entirely exempt from the 30 percent U.S. withholding tax. To qualify as portfolio interest, the loan must be from a foreign lender and must meet several requirements. The main requirement as it pertains to a Debt STO is that the debt must be in “Registered Form”.  Meaning, the original and subsequent beneficial owners must be recorded in book-entry form.  This requirement is solved perfectly with STO blockchain technology.   REICL will obtain a Tax Attorney’s Opinion Letter, to assure our bond investors that our bond will qualify for this exception.

 

What are REICL’s Underwriting Standards?

The REICL Bond STO will provide the Debt financing for portfolio acquisitions and adhere to the following underwriting requirements.  Adherence to Underwriting standards is essential to establishing confidence with bond investors.

  • REICL will maintain an average Loan to Value Ratio (LTV) of 65%. Where the “value” is the acquisition price. An LTV ratio is calculated by dividing the amount borrowed by the lesser of the appraised value or purchase price of the property, expressed as a percentage. The balance of the capital required for acquisitions will be from Equity Investors. For commercial real estate the financial institutional standard is 75% or less.
  • REICL will maintain an average Debt Service Coverage ratio (DSCR) of 1.75x. The DSCR is a measurement of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year, including interest and principal. For commercial real estate the financial institutional minimum standard is between 1.15x and 1.5x
  • REICL will obtain an appraisal from a nationally recognized appraisal firm (i.e. CBRE) prior to closing on any acquisition and will not pay a price above the appraised value.

 

The Paradox of “Negative Interest Rates” is Relevant!

Due to the current and persistent “negative interest rate” environment in various parts of the world; there are a large number of global investors seeking low risk “Income” investments.  They seek the positive income yields that are typically delivered by U.S. REITs.  According to the National Association of REITs (NAREIT) all REIT index:

Yield Comparison Averages for the year ending December 2019:

ALL U.S. REITS:  4.06%
All Equity REITS: 3.70%
S&P 500:    1.85%

On average, 70% of the annual dividends paid by REITs qualify as ordinary taxable income, 15 percent qualify as return of capital and 16 percent qualify as long-term capital gains.


Traditional U.S. real estate EQUITY investments cannot offer “Income” to non-U.S. investors (those who do not file U.S. Tax returns) because of the IRS 30% withholding tax rules.