Changing Leases into Investment-Grade Bonds: Financial Alchemy and Cost Reduction in Real Estate Finance

Abstract

Executive Summary. Ownership of economic benefits from current leases of real property can be separated from ownership of economic benefits from future leases. The ownership interests can be securitized into assets that are independent of each other for investment purposes. Ownership of benefits from current leases can be regarded as a fixed-income asset. In the case of single-tenant property with a bondable-net lease and investment-grade tenant, the fixed-income asset is ratable based on the tenant credit rating and lease default provisions. In the case of general properties and leases, the fixed-income assets are ratable provided additional financial structure is superimposed. The fixed-income assets can be sold as corporate bond-equivalents in the private placement market to create low-cost leverage for real estate investments.