Structuring CRE-CLOs: Tax, Eligible Assets, Closing Timeline, Investment and Servicing Concerns

Description

CRE-CLOs allow REITs and other mortgage loan funds to finance their loan portfolios with match term funding via the capital markets as an alternative to bank provided repurchase facilities or lines of credit. Unlike REMICs, CRE-CLOs may hold reinvest principal proceeds, which makes it an attractive vehicle for financing short-term bridge loans.

CRE-CLOs are typically structured as either a qualified REIT subsidiary (QRS) or a foreign corporation. When operating as a foreign corporation, the sponsor must be able to demonstrate that it is not originating loans as an agent for the CRE-CLO in order to avoid entity-level taxation. This may include "seasoning" of loans before transferring them to the CLO and other deal specific guidelines.

CRE-CLOs have a limited reinvestment period (typically two years) in which the CLO can reinvest any funds received from repayment or refinancing of portfolio loans into new debt instruments. After that, the CLO manager must revert to receiving and distributing funds to investors as the portfolio amortizes down for the remainder of the life of the CLO.

Loan structuring requirements are similar to those required for REMIC securitization. SPE covenants, recourse carveouts, reserves, cash management, and independent directors may be required as a prerequisite to a loan's inclusion in the securitized pool. Originators should adopt closing and documentation requirements that enable a smooth transition to the CRE-CLO.

Listen as our authoritative panel discusses the various nuances of CRE-CLOs, including tax structuring, CLO administration, and loan origination concerns.