Planning, Strategizing, and Anticipating: Bringing a CRE CLO to Market

Abstract

The authors discuss basic structural and process considerations relating to the execution of a commercial real estate collateralized loan obligation (CRE CLO) transaction, focusing on several key differences between CRE CLOs and more-standard CLOs, with a particular emphasis on the tax analysis. The authors explore the tax challenges of the REMIC and grantor trust structures, as well of the advantages and disadvantages of utilizing a qualified REIT subsidiary (QRS) structure or having the issuer domiciled outside of the United States in a traditional offshore CLO/CDO structure. In recent years, CRE CLOs have provided CRE CLO sponsors an important financing alternative for transitional properties, one that is nonrecourse to the CRE CLO sponsor, and generally offers better match-term funding, and largely eliminates mark-to-market risks for the CRE CLO sponsor. CRE CLOs use much of the terminology and technology of middle market CLOs and achieve like goals for sponsors by achieving balance sheet leverage, but the nature of the collateral and the tax structure underlying the CRE CLO are fundamentally different from other CLOs. A potential CRE CLO sponsor should be aware that asset level disclosure in the CRE CLO market is far more granular than that for middle market CLOs. A potential CRE CLO sponsor should consider that significant company resources will be devoted to vetting the disclosure for a period of several months.

TOPICS: CLOs, CDOs, and other structured credit, legal and regulatory issues for structured finance

Key Findings

• • In recent years, CRE CLOs have provided CRE CLO sponsors an important financing alternative for transitional properties, one that is nonrecourse to the CRE CLO sponsor, generally offers better match-term funding, and largely eliminates mark-to-market risks for the CRE CLO sponsor.

• • CRE CLOs use much of the terminology and technology of middle market CLOs and achieve like goals for sponsors by achieving balance sheet leverage, but the nature of the collateral and the tax structure underlying the CRE CLO are fundamentally different from other CLOs.

• • A potential CRE CLO sponsor should be aware that the level of asset level disclosure in the CRE CLO market is far more granular than in the middle market CLO market. Given the transitional nature of the underlying properties, which require more due diligence by investors, together with short loan terms, investors demand significantly more disclosure than a middle market CLO offering. A potential CRE CLO sponsor should consider that significant company resources will be devoted to vetting the disclosure for a period of several months.