NewApplicationsOfMasterTrusts.pdf

New Applications of Master Trusts:

Financing Single Family Residential

Rental and I-Buyer Properties

By Paul A. Jorissen and David A. K. Linley

In this article, the authors explain how master trusts provide efﬁciencies in connection

with the ﬁnancing of single-family residential rental properties and high-velocity purchase

and sale arrangements for residential properties.

As the market for ﬁnancing single-family res-

idential rental properties (SFR) and high-

velocity purchase and sale arrangements for

residential properties (I-Buying) matures,

stakeholders are looking for efﬁciencies in the

ﬁnancing process. Sponsors and originators,

servicers, property managers, rating agencies,

warehouse banks and securitization investors

are looking to streamline the ﬁnancing pro-

cess to reduce overall execution expense,

speed up the availability of warehouse and

term ﬁnancing, and free up capital to reinvest

in new assets.

Master trusts, familiar in other asset classes,

provide a basis for seeking these efﬁciencies

without sacriﬁcing the fulsome information

transparency and collateral security that rating

agencies, lenders and investors expect. Secu-

ritizations ﬁnancing SFR in particular have

historically adopted the “large loan” approach

long used in commercial mortgage backed

securitizations. While relatively robust, the

securitization of a single-borrower loan is less

ﬂexible than a securitization backed directly by

the real estate. By using this familiar master

trust technology, and adapting it for the SFR

and I-Buying market spaces, stakeholders can

drive the efﬁciencies that beneﬁt all of the mar-

ket participants.

This article ﬁrst describes the historic “large

loan” structure and its key attributes. It then

turns to the key features of a master trust

structure and its beneﬁts. This article con-

cludes with observations about possible ap-

plication in the future, including combinations

with other structuring techniques, such as

titling trusts.

THE CURRENT SECURITIZATION

APPROACH: DESCRIPTION OF A

TYPICAL LARGE LOAN STRUCTURE

In the typical structure for securitization of

SFR, the properties are transferred to a

special-purpose vehicle (SPV) that will act as

the borrower. At the closing of the securitiza-

tion, an accommodation lender, typically an af-

The authors, partners in Mayer Brown LLP, may be contacted at [email protected] and

[email protected], respectively.

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ﬁliate of the investment bank that is structuring

the securitization, originates a mortgage loan

(an accommodation loan) and extends the

proceeds to the SPV borrower. The accom-

modation lender is never out-of-pocket. The

accommodation loan is sold to a securitization

depositor that forms a trust that is the securiti-

zation issuer, and contributes the accommoda-

tion loan to the trust in exchange for the

securitization securities. The depositor,

through the securitization placement agents,

offers the securitization securities to investors

in a typical 144A/Reg S offering. The proceeds

of the securitization offering are transferred to

the depositor to put it in funds sufﬁcient to pay

the accommodation lender for the acquisition

of the accommodation loan.

To provide the most efﬁcient form of ﬁnanc-

ing, the securitization trust issues multiple

classes of securities each bearing a different

rating, interest rate, and credit attachment and

detachment points. The accommodation loan

is componentized at origination to match the

various classes of securities (i.e., the Class A

Certiﬁcates are supported by the cash ﬂow

from Component A on the loan, the Class B

Certiﬁcates are supported by the cash ﬂow

from Component B on the loan, and so on.)

Accordingly, rent received by the SPV bor-

rower on the SFR properties is segregated and

applied in a monthly waterfall to meet the SPV

borrower’s interest obligations and other pay-

ment amounts under the loan. As the securi-

tized ﬁnancial asset, the loan proceeds are

then used to pay the investors holding the

securitization securities.

Because the accommodation loan can be

structured as a qualiﬁed mortgage loan, the

securitization trust typically makes a REMIC

election over the loan. While REMIC qualiﬁca-

tion results in a tax-efﬁcient structure, using a

REMIC tends to limit the ﬁnancing ﬂexibility.

As a consequence of needing the loan to be

REMIC-eligible, the securitization issuer holds

a single loan and issues one series of securiti-

zation securities. REMIC securitization struc-

tures generally have little or no pre-funding

period, and no revolving period absent certain

limited substitutions including for ineligible

properties. Since the securitization securities

are backed by the loan, they are usually

viewed as asset-backed securities under ap-

plicable Federal regulations and, accordingly,

the U.S. Credit Risk Retention rules apply.

MASTER TRUST STRUCTURES: FIRM,

FAMILIAR AND FLEXIBLE

Master trusts have a long history in the

capital markets, being used in multiple asset

classes for decades. They have been used for

warehouse and securitization arrangements,

rated and unrated transactions, and are sup-

ported by a fully built infrastructure of active

trustees and vendors necessary for their ef-

ﬁcient deployment. Master trusts provide a

solid and robust structure that is well-known in

the market, and yet is ﬂexible enough to be

readily adaptable to SFR and I-Buyer

ﬁnancing.

In the most common version of a master

trust structure, there is no need for an accom-

modation loan; the master trust holds the as-

sets directly as issuer in the ﬁnancing. Master

trusts can and do issue additional securities in

multiple series from time to time as more as-

sets are transferred to the issuer trust. This is

so whether the assets being transferred to the

trust are familiar and frequent users of master

trusts (such as credit card receivables) or

leased “hard” assets (such as railcars or

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containers). The same principle applies for

SFR and I-Buyer properties; as properties are

acquired by the issuer trust, new securities

are issued to fund their acquisition, subject to

compliance with preagreed eligibility guidelines

and advance rates.

One point of ﬂexibility in a master trust is

that each new series can be collateralized by

all the properties in the trust, or be segregated

such that each new series ﬁnances a deﬁned

subset of properties (e.g. properties under ren-

ovation, or properties that have become

seasoned). Each series can encompass differ-

ent classes and charging, different interest

rates (including ﬁxed or ﬂoating rates) and use

different credit enhancement, all as the market

conditions warrant. To mimic the ﬂexibility of a

credit line, master trusts can issue series in

the form of a variable funding note, alongside

traditional term debt.

Master trusts, by their nature, are not bound

by the need to have a certain asset type. So

long as the cash ﬂows are captured and ap-

plied in a waterfall, a master trust can accom-

modate single-family residential properties

(including their lease income and, when used

as a form of warehouse ﬁnancing, proceeds of

sale such as to a joint venture or permanent

ﬁnancing vehicle) or I-Buyer properties pend-

ing sale where the proceeds of sale are

reinvested in new, eligible properties or used

to repay the debt.

Master trusts are generally structured as

debt-for-tax rather a REMIC and, accordingly,

are not bound by the requirements of a

REMIC. Master trusts can have unlimited

revolving or prefunding periods, subject only

to investor appetites and sponsor needs.

Within the bounds of eligibility and advance

rate requirements, generally properties can be

added to and removed from the master trust;

when properties are sold, their asset value is

replaced with cash and accordingly master

trust investors are always fully collateralized.

Combining these ﬂexible features mean that

master trusts can be utilized in lieu of tradi-

tional warehouse ﬁnancing, or serve as term

ﬁnancing.

Master trusts typically use master program

documents (such as an indenture) and short

supplements (for each series). For capital

markets transactions, this is often mirrored by

a base prospectus or other offering document,

and a prospectus supplement or similar docu-

ment that describes the particular features of

the series. As such, the time to market and

the inherent expense of each offering should

be materially less than would be the case with

repeat large loan securitizations.

In a master trust structure as described, the

assets held by the trusts would be SFR or

I-Buyer properties; that is, physical real estate.

U.S. Credit Risk Retention rules generally

would not be expected to be applicable as the

securities issued by the master trust would not

be “asset-backed securities” in that they are

not repaid primarily with the proceeds of a self-

liquidating ﬁnancial asset.

POSSIBLE FURTHER ADAPTATIONS

FOR MASTER TRUSTS FOR SFR AND

I-BUYERS

Master trust structures to date in the SFR

and I-Buyer spaces have been structured pri-

marily as warehouse ﬁnancing, and, accord-

ingly, have not been rated and have not

utilized mortgages. In a rated, term securitiza-

tion of SFR properties, it has been desirable

that the properties be secured by mortgages

New Applications of Master Trusts: Financing Single Family Residential Rental and I-Buyer

Properties

The Real Estate Finance Journal E Winter 2023

to better support the ratings sought on the

securities.

Delaware statutory trusts are widely used

as titling trusts, to own and facilitate ﬁnancing

of assets assigned to a separate series of the

trust that is generally treated as separate from

other series under law. In order to be a

ﬁnanceable asset, the property must be owned

by the borrower; however, there is friction and

signiﬁcant expense involved in retitling assets

through the warehouse and securitization or

term-ﬁnancing phases. While use of a “re-

cycled SPV” that meets rating agency require-

ments can ameliorate this issue to a degree, it

nevertheless represents a signiﬁcant execu-

tion cost in forming every securitization pool.

Using a titling trust - the premise of which is

this segregation among series but no change

in the trust’s legal title ownership - would

signiﬁcantly simplify the warehouse ﬁnancing

of assets and the subsequent formation of

each securitization pool and its ﬁnancing. Each

series of the trust would issue a beneﬁcial

interest that can be held by a bank or be used

as collateral for a term-ﬁnancing or securitiza-

tion of the properties. The individual properties

can be moved from one series (e.g., a bank

warehouse line) to another series that is a

master trust or other securitization on the

books and records of the trust without a new

deed, recordation or related taxes.

CONCLUSION

With the maturation and development of the

market for ﬁnancing SFR and I-Buyer proper-

ties, stakeholders are looking for efﬁciencies

in the ﬁnancing process. Master trusts can

provide efﬁcient ﬁnancing structures that can

be tailored to the needs of sponsors and issu-

ers while providing investors and lenders with

the robust collateral security they require.

Master trusts can help provide a seasoned and

well-understood method of ﬁnancing by series

in a manner that achieves the optimal outcome

with the least friction (in time and money)

possible.

NOTES:

Historically, SFR securitizations have been mar-

keted to Reg. S investors in the European Union and

United Kingdom, although no speciﬁc compliance with

the transparency requirements has been undertaken by

issuers or sponsors. With recent European Commission

guidance on the EU Securitisation Regulation, compli-

ance by affected European investors with the EU

Securitisation Regulation will be difﬁcult in the context of

SFR securitizations. Whether there will be a divergence

between the EU Securitisation Regulation and the United

Kingdom’s approach remains to be seen, as the UK is

looking to revoke its retained EU ﬁnancial services law,

and replace it with UK domestic law.

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The Real Estate Finance Journal E Winter 2023