Bond Issue - Real Estate

March 19, 2010


This general summary describes the use of taxable floating rate debt with regard to the purchase and/or development of industrial, commercial or residential properties. Projects that should be considered for this financing structure include purchase of raw land, land development and construction within a development, including commercial development in the form of homes, office complexes, multifamily facilities, hotels or retail space, as well as manufacturing and warehousing facilities. Amenities included in a development such as parks, golf courses or other recreational facilities may also be included in such a financing.

A taxable floating rate bond issue is typically supported by a Letter of Credit issued by a bank rated Al/P1 or better by Moody’s Investors Service, and the applicable interest rate will typically be reset each week by our Firm serving as Remarketing Agent. The maturity on such a financing instrument is generally long term, but the borrower has the option to pay down the debt as the property/development is sold or to use the income from retail or commercial facilities to amortize the debt over a longer period of time. Our Firm, as remarketing agent, sells this debt into the national market, and since the interest rate changes each week, the borrower has access to the equivalent of a commercial paper program. Typically, non-Fortune 500 companies do not have access to this low interest rate market, and a taxable lower floater secured by a bank Letter of Credit provides such access.

Bank Letters of Credit are usually issued with an initial term of one to five years, but in some cases banks will make longer term commitments. Lower floater bond issues are frequently sold with relatively long final maturities, but with the expectation that, as the project develops (in the case of the sale of residential or commercial property), or as rental and lease payments come in (as in the case of an office building or retail development), principal payments will be made. Our Firm works with the borrower/developer to structure the most flexible terms and conditions with the bank providing the LOC.

Assuming that the cost of your Letter of Credit is 1.125% and the cost of remarketing (which is paid quarterly in arrears) is approximately 0.125%, it can be seen that the spread between the taxable lower floater and the prime rate would, in today’s market, be significant. Over the life of a project, savings can be substantial. For a borrower at “prime plus”, the savings are even greater.

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