Tag Archives: #RealEstate

Real estate securitization: here to stay

  • Real estate securitization: here to stay 1

After a slight initial mistrust and an incubation period, we can say that real estate securitization is gaining momentum in Italy. Until a few months ago, in sector conferences the completed issues were accounted for, now no more and this means that the market in question is maturing.

Real estate securitization was introduced and governed by the amendment of Law 130/99, in particular with the introduction of article 7.2 of Law Decree no. 34. The same provision introduced article 7.1, which regulated the so-called “Reoco” or Support Vehicle Companies (SVA).

The latter was quickly acknowledged by the reference market, because in fact the presence of a real estate company supporting a securitization vehicle is to be considered an ex post regulated practice. The first operations of enhancement / redevelopment of collateral properties of GMA date back to 2011, with all the operational difficulties deriving from the absence of regulation but also with the undoubted beneficial impacts of this activity on the recovery of mortgage loans.
For real estate securitization, on the other hand, this is an absolute novelty, which logically could not have developed ex ante. In fact, a new hybrid market is being created between structured finance and real estate, which will involve new investors accustomed to other forms of investment for the same asset class in the world of securitization and debt securities.
I was asked what are the differences between the two tools; thinking about it coldly, having acknowledged that in fact the only substantial difference concerns the presence or absence of a connected mortgage credit, it is easier to trace the related sides to each real estate sale that potentially extend the mechanisms of securitization:

  • financial procurement derives from the issue of ABS securities. The novelty obviously does not lie in the possibility of issuing debt securities but in the type of securities themselves, potentially of interest to the whole private debt / family office world; this opens the door to new possibilities of intersection between the world of structured finance and real estate, which in the future will sublimate into joint ventures and partnerships with high added value in terms of skills;
  • the flows deriving from the properties benefit from the asset segregation in favor of the bondholders;
  • the profits deriving from real estate transactions are distributed as part of the securitization with all the relevant benefits, first of all the fiscal neutrality on direct taxes; they are therefore subjected to financial income profits obtained through the enhancement of real estate, net of the expenses necessary for the enhancement itself.

As in all the activities resulting from the new legislation, with the implementation doubts arose in terms of interpretation and aspects to be reviewed related to ordinary operations:
– the fiscal aspects related to instruments 7.1 and 7.2 are not yet fully understood; a definitive clarification on the part of the legislator would be desirable which takes into account primarily the ratio legis and which enables operators to have equal conditions of use in order not to create competitive advantages / disadvantages within the reference market;
– the intersection with the real estate context has led to the emergence of some operating practices that are not very compatible, repetitive or commercially poorly perceived; I am referring, for example, to the coexistence between publication in the Italian Official Gazette and the transcription to the Conservatory of Real Estate Registers (which perform the same function), or to the inclusion in notarial deeds of typical conditions of securitization such as limited recourse or non-petition agreement that in a recent case we have created some commercial problems with the counterpart, which, not knowing the subject, initially experienced the matter with suspicion. Even the majority of Notaries are not yet prepared on the subject, they need to be involved in order to create culture in this sense and arrive in a short time at accepted operational practices;
– even among insiders it is still not perfectly clear whether all types of real estate / land can coexist within real estate securitization. For the latter, for example, there is much discussion on the applicability of the concept of segregation of flows, even if in fact they are able to generate it in the same way as buildings; in other fora it was discussed how the Ex-Chapters (e.g., restructuring / construction costs) cannot be prevalent. In any case, these are subjective interpretations, which it is hoped can be aligned by the univocal interpretation of the Legislator.

To conclude, I would like to share with the reader the concept that the real estate securitization tool may in the future definitively supplant the obsolete scheme for disbursing real estate credit, which is still too anchored to the static valuation of the collateral. If it is true that traditional banks are evaluating more carefully the forecast of flows and the stability of the cash flow, it is also true that the difficulty in channeling them makes the perception of risk too high.
The use of an SPV, managed and monitored by a qualified financial intermediary and with a predefined and regulated waterfall, creates the conditions for greater serenity in the disbursement of loans, making the mortgage guarantee almost superfluous.

It is a truly innovative concept of project financing, applied to the real estate context, and perhaps in the future also to other business areas.
I would like to think that credit institutions, including the potential of the tool, are asking their customers to use it as a sine qua non for granting credit.

Emanuele Grassi

Joint Ventures, why not?

Joint Ventures, why not? 2

Published on 02/02/2022 on Creditvillage.news

At the end of November, I had the opportunity to participate in a conference organized by Zenith Service on real estate securitization.

We brought to the conference our testimony as a first mover in this particular category and it was an opportunity to deepen some issues and discuss with prepared and pragmatic colleagues.
As often happens, through discussion and listening, new points of view and new opportunities emerge. Our current view of this area of securitization was probably correct but incomplete; the testimony of a master servicer and other special servicers has enabled us to understand different situations, which we had not imagined and which we had not thought about.
We are convinced, for example, that some real estate operators have finally approached the tool and are starting to perfect the first operations. Most of the operators had noticed that the first to go were different players; paradoxically, the point of entry into the instrument was not real estate but the possibility of investing in this asset class by issuing bonds.
In essence, the investors who entered first did so attracted by the greater perceived comfort in the structure rather than by the intrinsic characteristics of the operations.

Obviously, none of these are / were divorced from the real estate world, but in fact they weren’t even before; this means that the new regulations have played a decisive role.
Reasoning on the ratio legis and having acknowledged that everyone (including us of course) has the right to exploit the opportunity, it seems clear to me that the will of the legislator is to move capital into the real estate market and to introduce a more effective investment mechanism in the latter regulated and compliant. It is clear that if real estate developers do not enter the game, the ratio legis is only half fulfilled.
What emerges with respect to the approach of “pure” real estate developers to the world of real estate securitization is paradoxically the opposite problem that occurred with the first movers.

While the latter, master and special servicers, had few problems in arranging operations but several structural adaptation problems due to the new composition of the underlying (poor knowledge of the subject for master servicers and need for adaptation of asset managers, business plans and reports for special servicers), now the exact opposite occurs: the new approaches are perfectly familiar with the asset class but have little (or no) familiarity with the dynamics of SPVs.
At this point, at least two scenarios could emerge in the coming months:

  • mutual exchange of skills between players and organic strengthening of the servicer structures (substantially mandatory for masters, optional for specials)
  • birth of intermediate professional figures (special servicer or advisor) who make up for the missing know-how of the parties involved.

There is no right or wrong choice, it depends on various factors such as the occasional nature of the operations and the propensity of the entrepreneur / servicer to outsource. What appears evident is the will of the regulator to include in the market an instrument that raises the level of compliance and the entry threshold for the execution of certain operations and the management of the related investment capital.

The writer is convinced that the tool, if applied correctly and in the long term, can revolutionize the approach of banks to real estate investment and the provision of guaranteed loans in a general sense.
The obsolescence of the real estate risk assessment system is obvious to all: it is based on guarantees and not on flows; taking out the mortgage is time-consuming and expensive; the returns are extremely low. Extending the instrument to a less qualified market is a challenge which, if successful, will lead to the provision of more informed, less risky and more profitable credit.

The third scenario involves the creation of Joint Ventures between the various servicers. Between finance and real estate, to generalize. Obviously, we can structure ourselves, but it is undeniable that a mixture of the different strengths can lead to a better result.
The enormous flexibility of the securitization tool and the ability to customize risk and remuneration levels represent the ideal scene for a joint venture. Through the preparation of a detailed business plan and the prediction of the various scenarios, all the possibilities can be regulated from the beginning and situations of possible misunderstanding and operational blocks can be reduced to a minimum.

The risk capital necessary for the redevelopment of real estate and ancillary costs (so-called capex) has a decidedly different weight and perception between real estate and non-real estate operators; obviously it is not the only point of intersection, even if in any case the contribution of this capital / work represents the ideal context of the union between the two types of actors.

We will monitor the developments of this market with the conviction that it represents a path that once started we will never go back.

Emanuele Grassi

Earthquake – Eco – Super Bonus: a new opportunity for the NPL world

Earthquake - Eco - Super Bonus: a new opportunity for the NPL world 3

Here, I think it is superfluous to an introductory talk about the restructuring bonuses also because in this particular historical period it is probably the most talked-ever issue among insiders and outsiders.

The restructuring bonus in its earthquake / eco declinations has existed for some time, what today makes it so attractive and “sensational” are probably two of the new features introduced, the most significant:

1.   the so-called super bonus and the associated rate, which reaches 110% (effectively generating a credit higher than the value of the restructuring);
2. the possibility of more easily transferring the tax credit to third parties, with banks that are well equipped to seize this opportunity.

Obviously, we operators of the secured NPL / UTP market have listened to our ears. In GMA in particular, we spent a lot of time and resources during the spring lockdown to study the matter and analyse practical cases; today we can say that we are able to tackle the topic with greater awareness and we have the ability to identify potentially attractive and eligible situations in advance for the application of bonuses.
We have summarized in points what we consider our most important considerations:

– bonuses also apply to Reoco and repossessed NPLs. Those (like us) who had some initial doubts, deepened the matter: there are no limitations whatsoever for Reoco and repossessed assets more generally, in recent months there has been a debate on the applicability of bonuses to legal persons and more than one ruling by Cassation and the Tax Commission have expressed themselves favourably on the matter;

–  there are prerequisites for the applicability of bonuses. This is not the place to list them all, it is sufficient to say that there are some prerequisites that unequivocally determine the possibility of accessing the bonuses and the maximum quantification of the bonus payable; for operators this aspect is of particular importance, because it allows them to concentrate on the operations with the greatest probability of success. Obviously by addressing specific cases, the particularities of each position and the applicable rates are discovered;

–  starting a restructuring only for the benefits provided by the bonus is potentially a mistake. The practice is long and complex and the variables are many. Often, extra bonus costs, often not foreseen, are added to the costs subject to bonuses, which inevitably dilute the percentages and generate cash outflows not considered ab origine. Probably this consideration applies to this bonus and to all state subsidies in general. The question that needs to be addressed is: if there was no possibility of having the benefits, would we still do a requalification? If the answer is yes, the operation is a great opportunity and is faced with serenity;

– the bonuses expire at the end of 2021. We are well aware that more than one rumour has recently been raised about an extension, in particular for the earthquake-bonus and the eco-bonus; as of today, what is certain is that the concessions will be in force until December 2021. It is therefore necessary to plan the works considering the technical times and putting in the budget the possibility that if these should continue beyond, they could not take advantage of the concessions.

Emanuele Grassi

Real estate and mortgage credit: a new, rather agile market

Real estate and mortgage credit: a new, rather agile market 4

Published on 12/10/2020 on Creditvillage.news

Since the beginning of the pandemic, all of us operators in the sector have been asked the same question from various sides and in different contexts: how will the real estate market change? And what will be the impact of this change for all loans secured by real estate and land?

The first instinct was to give a generally optimistic answer with which to explain that the impact will be temporary and transversal and that in a short period everything will return to normal.

And indeed many things have already returned to normal: albeit with the necessary precautions, we have all returned to some old behavioral habits. After all, we all spent the same lockdown inside a building: obviously there is a base from which to start. Then, thought after thought, all the things that aren’t working yet came to mind. I don’t think I have enough space to mention all the situations in the real estate market that are still suffering the consequences of the pandemic; I am going to mention only one, so large and sensational that it contains them all:

Milan.

For those of the readers who have had the pleasure of being adopted (at work and otherwise) by this city or simply have been able to spend time there in the last 5 years, what I am about to say will sound very familiar. Until last January there was a crisp air. Milan had shaken off the label of a gray and smoky city to the sound of initiatives in step with the times, efficient and modern infrastructures, attracting the attention of the whole world with a consequent growing trend for practically the entire economy that gravitates around the city.

Today Milan is depressed, convoluted. Closed hotels, shutters down. The bartender in the office, after an initial period of self-induced optimism, has a perennial sad look. The mayor, challenging the logical consequence of looking crazy, begged the Milanese not to return to the city; to date it is not known when it will happen, and if it will happen.

The phenomenon of smart-working is not new in 2020; it is a process that began inexorably 10/15 years ago which has suddenly accelerated its effects. So the problem is not the change, but the fact that it is happening drastically. Milan and all the big cities in general have not had the time to adapt their ecosystem to change and this is generating a strong and painful impact.

This is generally true in describing the post-pandemic effects: the problem lies in the difference between change and adaptation time. These situations are typical of a natural disaster, which however normally affects limited and more or less isolated places; in a globalized world it is as if we were experiencing the effects of an earthquake on a world scale, which we have never experienced in book memory.

Once these reflections have been made and returning to the initial question, how can we think of giving an answer? Perhaps the right answer, which could make us appear unprepared, is the most honest: we don’t know. It is impossible to intercept all the trends of a complex market such as the real estate one, for at least three reasons:

– the world is too interconnected to be able to foresee all the consequences related to the temporary or permanent closure of a business;

– the real estate market is etymologically slow and therefore being slower than other sectors we will be able to see all the consequences;

– we do not yet know exactly how the world will react to a possible new widespread wave of infections and what the consequences may be for productive activities;

To this context of objective uncertainty, the variable NPL / UTP is added. The awareness has now spread that over the next 6/9 months banks will face a new wave of bad debts and defaults, just when it was thought that they had started to stem the problem. Once this situation has been acknowledged, operators are certainly not allowed to fall into despair. We all know that opportunities are hidden in the folds of a crisis and that by definition it is part of our job to address all problematic situations, focusing on the positives and solutions. I would like to focus on some general concepts:

– it will never be possible to completely prevent physical interaction between people, which is natural and which can never be completely replaced by the remote. For us Italians then, let alone! Thinking about it, all interactions of this type born in the past have always resulted in a physical encounter (I contact you on Linkedin, I meet you in person). The vast majority of the interactions we have remotely today and that we herald as a new normal have been born of face-to-face encounters. This means that the need to meet in the long term will prevail over social isolation, with all the consequences of the case for the real estate market;

– change means transformation, not destruction: this is also a law of nature. However strong the slap from Covid will be, sooner or later we will feel the blow and find another way to use our properties; it happened to the old factories of the early 1900s, to the old farmhouses of the mid 1900s, it will also happen to all those buildings (many or few) whose intended use will become obsolete;

– most of the current NPL / UTP market operators are the children of the great wave of bad debts that has been created in the last decade. Today servicing is a tested, focused and specialized activity; the old wave found banks and operators unprepared, the new wave instead will find an organized and mature market, much more efficient and evolved;

At this point, albeit with due caution and the precautions required, we reformulate the answer to the previous question: we don’t know, but we’ll be ready. We will take the best feature from the virtual world and bring it to all sectors: agility.

We will work in an agile, fast, liquid way. We will be ready to change our minds, we will dismantle old paradigms and build new businesses and new activities; we’ll roll up our sleeves, we’ll do whatever it takes. Whatever it takes, to paraphrase one of the most famous mottos of this complex year. If we have to change the intended use of a property, we will do it without thinking twice.

We will not skimp on investments in small and large capex, as long-term investments are worth their weight in gold during these times. We will invest in specialized and dedicated servicing activities, because agility is a commodity that is only found in boutiques.

If the debtor asks us to sit at a table, we will do it more willingly; if he doesn’t, we’ll invite him. We will conduct our business with confidence; even if certain situations seem without solution, history teaches us that the solution has always been found.

Emanuele Grassi

New tools available: 130 SPV Real Estate

New tools available: 130 SPV Real Estate 5

The changes introduced by Italian Law Decree 34/2019, subsequently converted into Italian Law No. 58/2019, have introduced and institutionalized two new methods of approach to property management, understood as property management and as the requalification of assets used to guarantee credit. We are talking about the support vehicle companies (SVA, better known by insiders as “Reoco”) and the Real Estate SPVs, an absolute novelty for the Italian context.

The first mentioned were used almost immediately for at least two reasons:

1. in fact they already existed, the Italian Law Decree simply institutionalized and regulated a consolidated practice;

2. the concessions introduced by the legislator have made the use of SVA extremely convenient even in cases where previously it would not have been (on the subject, consult the link “How not to use a Reoco“).

The context changes for SPV 130 Real Estate. The lack of knowledge of this tool by professionals and the particular area of application have made the reception of this novelty more cautious. I am referring in particular to the fact that in Italy, those who work in the world of debt collection have over time become familiar with the concept of securitization, while those who work in the real estate field many times do not know this topic.

Recently, some of our investors and customers learned about the SPV 130 Real Estate and asked us for technical and practical support to better understand how the two legal entities in question differ substantially. In addition to the obvious differences in application profile, there are at least 3 operational arguments on which to pay particular attention:

– while SVAs enjoy tax breaks for the payment of registration tax during the purchase phase and future buyers can also benefit from these facilities, SPV 130 Real Estate does not have this facility; probably because in the first case it is deemed necessary to facilitate preparatory activities for credit recovery, but infact non-core for some market players;

– for both, the management model applied to the segregation of assets must currently and in the future consider the different types of obligations that the vehicle companies will have to contract. For example: ownership of a property generates implicit obligations such as the payment of taxes (IMU, Tari etc) and condominium expenses; these subjects are potential creditors to whom the segregation of assets and the non-petition clause can hardly be accepted ex post;

– the accounting approach is similar, although it is an SPV and a limited company. On the other hand, there are substantial differences with the SPV for credit securitization: above all the deductibility of VAT, which in the Real Estate SPV130 becomes possible, pro-rata permitting.

More generally, the topic can generate various food for thought especially with reference to the SPV 130 Real Estate for which at the moment it is more about theory than practice; during 2021 the legislator will most likely clarify the remaining shadow points and the first operating practices will arise.

Emanuele Grassi