Creative Structuring for Securitized Deals

The Banca Monte dei Paschi di Siena, headquartered in Siena, Italy is the oldest bank still in existence, having operated continuously since 1472. Continuous operation doesn’t happen by accident. Banks deal with credit risks and find ways to lend money while also ensuring that they can recoup the money they lend out with interest. As can be inferred from the many banking institutions that fail, some are better at this than others.

For simplicity, textbooks often explain things in simple black and white terms; however, in finance, a little knowledge can result in a lot of unknowns and yield some creative options. One such case is an underlying site with storage containers, operating as a self-store property. As we’ve discussed in the past, self-storage facilities can make for great investments, especially given limited operational overhead costs.

This property was an unconventional self-storage operation made up of multiple rows of shipping containers (personal property). “For odd property types, it is not uncommon that we receive a phone call after property owners research and try to find solutions to their problems online,” shared Vice President Alexander Argianas. “In the current instance, the property owner’s lender denied financing as the land alone was not enough to collateralize the borrower’s loan at the requested level.”

Real estate or personal property

In commercial real estate, there is no ‘typical’ appraisal. Every property has nuances, and although real estate appraisal mostly involves land, structures, and improvements, there frequently are entanglements involving real property rights, business enterprise considerations, and personal property.

With a self-storage facility with pseudo-converted storage shipping containers, the argument can be made for and against those containers being personal property and not necessarily a fixture or real estate. So how does one determine if a portion of an improvement or fixture is personal property? In this example, were the storage containers personal property? Could the containers be affixed to the land in such a matter that they could be considered permanent structures?  The issue was whether their installation was or could be made permanent (to pass the test of real estate structures).

Creative thinking

A constructive solution may be to affix the containers permanently to the land. Although there’s more to this story, the point is that many real estate deals have transitioned through unique situations to achieve financing. Sometimes, it takes a little creative thinking to push a deal to the finish line with everyone (including the underwriting department) feeling satisfied.

We’ve previously touched on some of the key concepts banks look for when lending out money. From large lending institutions to local community banks and credit unions, a bank must be able to rationalize the lending decision given the creditworthiness of collateral associated with a contemplated loan. However, there sometimes are creative solutions to obtain financing.

alternative solution – master lease the entire property as a ground lease with on-site business operations

The property in question had operated for many years with stable earnings as evidenced by their profit/loss & balance sheet. While a lack of capital/lack of equity in a property can prevent financing, it is possible to monetize properties to create value that didn’t exist previously. In this case, the business entity had a history of stable earnings and ownership could provide additional security for the bank if a loan was granted. In addition, this self-storage property might be better collateralized assuming the creation of a long-term master lease for the underlying site, with the storage containers treated as trade fixtures. By structuring the deal in this manner revenue would be generated for the property and an income capitalization approach utilized. The result, a bankable value at a higher level than what one might otherwise achieve for the property as a simple vacant land parcel (appraised in leased fee). In simple terms, the business entity leases the land, regardless of what is on the land, which monetizes/securitizes the land and creates value previously nonexistent.

critical thinking

Creative solutions can result in win-win borrower-lender financing. As an outside consultant, Argianas sometimes sees opportunities that were overlooked by conventional problem-solving.

We’re pros when it comes to back-of-the-napkin math and creative thinking. It’s just one reason our clients have trusted us for more than 30 years (and why new clients come to trust us after a Google search). Are you looking for a sanity check on an unusual deal? Or maybe a simple email introduction? Call the team at Argianas today at 630.390.0113 or complete this form.