Finance Solutions for Commercial Real Estate Projects
DGS’ approach to CRE finance is a turnkey financial process that provides qualified Clients access to significantly lower borrowing costs with greater flexibility.
The Variable Rate Demand Obligation (VRDO) bond structure is designed to provide commercial real estate (“CRE”) Clients with more flexible and cost-effective funding alternatives to traditional commercial mortgage loans – applicable to refinancing, acquisitions and new construction project finance.
Advantages for Clients
- Significantly lower cost of funds
- Flexible terms that align with Client objectives / project requirements
- Ability to finance transaction expenses within the bond corpus
- No prepayment penalties in part or in full
- CRE Clients with superior projects and creditworthiness gain access to a remarkably efficient albeit under-utilized method to finance projects
- Qualified Clients / projects are provided a platform to achieve the “proxy” credit rating required to access senior debt markets ordinarily reserved for highly-rated public companies and municipalities
- DGS coordinates and facilitates activities with the participating Bank and Investment Bank
Client / Project Profile
- Client has superior credit standing and, ideally, has relationships with multiple banks that can be approached in concert with DGS for credit enhancement
- If refinancing, project is stabilized with 70-75% LTV or lower
- If acquisition, development and construction financing, minimum of 25-30% equity or collateral required as determined by the Bank underwriters
Frequently Asked Questions
What flexible features does the VRDO solution offer?
- There are no prepayment penalties
- Closing costs can be financed into the overall debt
- The term of a financing can be as short as one year and as long as 30 years
- Financing can be structured as 100% senior debt
- Collateral requirements can be met in numerous ways, including posting cash, marketable securities and other acceptable assets
What are the minimum and maximum sizes for a financing?
The minimum transaction size is typically $10 million, and there is no maximum.
How durable is the bond market that provides the source of funds?
The marketplace for this type of financing is over $400 billion of proceeds per year and has been in existence since 1962.
Is VRDO a viable option for “hard to fund” projects?
No. If banks have been unwilling to provide traditional commercial lending support for a project, it’s unlikely that they will be open to providing credit enhancement for the project either. VRDO works best when associated with high quality CRE projects associated with Clients with strong credit ratings, ample equity or other collateral.
What kinds of commercial banks can act as the Bank to provide credit enhancement under a VRDO bond solution?
Acceptable Sponsor Banks may include major national banks, regional banks, and local community and credit union banks.
How does the bank’s underwriting due diligence process for a VRDO solution compare with that for traditional commercial real estate loans?
The bank underwriting commitment process for credit enhancement is virtually identical to that for traditional commercial real estate loans.
What constitutes security for the bank that provides credit enhancement for a VRDO bond solution?
Commensurate with typical commercial lender requirements, the bank is secured by the value of the project, the equity or the posted collateral. The bank providing credit enhancement will determine whether it will be recourse or non-recourse.
Are there upfront fees under a VRDO solution?
No. Fees to DGS, the bank providing the credit enhancement, the Investment Bank, Bond Attorney and Bond Trustee are structured as “success” fees. If desired by the Client, these fees can be included in the bond principal.
Information regarding DGS’ VRDO program is provided only to inform qualified developers or other CRE professionals of the availability of this program. This information is not an invitation or offer to purchase or to enter into a business agreement or transaction. Participation requires initial analysis by DGS to confirm that the project and the Client meet the requirements for this program. DGS’ role is as Managing Consultant, assisting Clients as subject matter expert under the VRDO process. DGS is not a commercial lender nor a provider of debt or equity capital.
For more information about DGS’ finance solutions for commercial real estate, please contact:
VP – Product Specialist & Capital Markets