Forming a limited liability company (LLC) to acquire, develop and hold real property is a common strategy employed by non-profits. Similar to a corporation, an LLC provides its owners (referred to as members) with limited liability protection. In CTL transactions the LLC is typically owned by the non-profit credit tenant as the sole member. Such an LLC is treated as a “disregarded entity” for tax purposes, meaning that it is tax exempt because its sole member is tax exempt. Additionally, the disregarded entity is not required to file a tax return.
A bondable net lease is structured between the non-profit “Sponsor” as the credit tenant and the LLC in an amount sufficient to support the desired borrowing. The high credit nature of the Sponsor tenant allows for a loan structure based upon the balance sheet of the Sponsor rather than the real estate. The resulting structure is a private bond secured by a lien on the real estate owned by the LLC. Midwest Credit Lease LLC (MCL) advises clients on lease and bond structure and along with a national Placement Agent places the private bond with life insurance companies and pension funds.
The private bond eliminates the need for the typical Bond Counsel, Underwriter Counsel, Underwriter Fees & Expenses, Issue Counsel, Rating Agencies Fees, Underwriting Fee, and Issuer Fee of a public bond. In a CTL bond private placement only three parties are involved, the Sponsor, the MCL/Placement Agent and the Institutional Investor. Compared to a public bond, a private bond has a simpler structure and an easier and quicker execution. In addition, the interest rate can be immediately locked-in for 90 days at no cost upon the acceptance of a bond purchase commitment.
The private bond would generally be of a 15 to 30 year term at a fixed rate based upon the average life of the bond. While the private bond is not tax exempt, the long term, fixed rate nature of this bond appeals to institutional long term debt buyers who need to match long term assets with their long term liabilities. Spreads over average life Treasuries are quite low and costs of issuance is miniscule compared to a public issue. Some direct placement bonds are purchased by banks. Unlike Bank bonds the term of a CTL financing can be set to fully amortize the debt within the loan and lease term eliminating any refinance and interest rate risk.
Additional advantages for non-profits are:
- Increased loan dollars up to 100% LTV to reduce cash needed in project budgets
- Debt service coverage of 1.0 times based upon the bondable net lease payments
- Non-Recourse Financing
- No Financial Covenants
- No General Receipts Pledge
- No Debt Service Reserve Fund
- No private use restrictions
- No credit rating required
- No Post-issuance Compliance required
For a discussion of current issues facing financing of Non-Profits please see the Non-Profits Blog page.
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