Jones Lang LaSalle
Financing Product for Single Tenant Properties Launches
March 02, 2006
By Eugene Gilligan, Senior Editor
The Norseman Group, in conjunction with RVI Group, used its new product, the Zero Tenant Note, or ZTN, for the first time yesterday. The transaction was a $2.3 million ZTN on six Best Buy properties owned by a large portfolio owner of single tenant properties. The new product is a mezzanine loan written on top of single tenant properties that are not generating current cash flow, and is encumbered by long-term, fully liquidating long-term credit tenant lease mortgage debt.
"Five to 10 years ago, when the cap rate environment hovered in the 9 to 11 percent range, owners of these 20-year leased properties could obtain 95 to 105 percent loan-to-value financing trough the use of credit tenant lease debt," said Joseph Yiu (pictured), managing director of The Norseman Group. "Many years later, though, these owners are discovering that their initial capital structure, although promising at the time of closing, is problematic today."
Shortly after the 10th year of ownership, the credit tenant lease mortgage payment deviates from a large interest component, to that of mainly principal, he explained. This shift means a significant rise in taxable income, and could leave a cash-strapped owner in a vulnerable state. And, because there is no cash flow, the asset would have limited appeal to most real estate investors, meaning that the owner is faced with selling a property, which may have substantial residual value, at a major discount.
The ZTN allows owners to draw against the property's future value. Because there is no cash flow to service additional debt, the ZTN accrues in interest and principal, resulting in a balloon payment, secured by residual value insurance that is provided by RVI Group. "It allows the borrower to deduct yearly interest expense, thus reducing taxable income," said Chris Carlisi, senior associate at The Norseman Group. Interest in the ZTN has come from two types of clients.
"One group has seen their property appreciate, and want to monetize the asset," Carlisi said. "The other group wants to mitigate phantom income coming out of the asset."
Financing Product for Single Tenant Properties Launches
March 02, 2006
By Eugene Gilligan, Senior Editor
The Norseman Group, in conjunction with RVI Group, used its new product, the Zero Tenant Note, or ZTN, for the first time yesterday. The transaction was a $2.3 million ZTN on six Best Buy properties owned by a large portfolio owner of single tenant properties. The new product is a mezzanine loan written on top of single tenant properties that are not generating current cash flow, and is encumbered by long-term, fully liquidating long-term credit tenant lease mortgage debt.
"Five to 10 years ago, when the cap rate environment hovered in the 9 to 11 percent range, owners of these 20-year leased properties could obtain 95 to 105 percent loan-to-value financing trough the use of credit tenant lease debt," said Joseph Yiu (pictured), managing director of The Norseman Group. "Many years later, though, these owners are discovering that their initial capital structure, although promising at the time of closing, is problematic today."
Shortly after the 10th year of ownership, the credit tenant lease mortgage payment deviates from a large interest component, to that of mainly principal, he explained. This shift means a significant rise in taxable income, and could leave a cash-strapped owner in a vulnerable state. And, because there is no cash flow, the asset would have limited appeal to most real estate investors, meaning that the owner is faced with selling a property, which may have substantial residual value, at a major discount.
The ZTN allows owners to draw against the property's future value. Because there is no cash flow to service additional debt, the ZTN accrues in interest and principal, resulting in a balloon payment, secured by residual value insurance that is provided by RVI Group. "It allows the borrower to deduct yearly interest expense, thus reducing taxable income," said Chris Carlisi, senior associate at The Norseman Group. Interest in the ZTN has come from two types of clients.
"One group has seen their property appreciate, and want to monetize the asset," Carlisi said. "The other group wants to mitigate phantom income coming out of the asset."
posted by Jones Lang LaSalle NJ News Blog at 1:39 PM
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