Introduction
We are often asked by clients about cross-border commercial mortgage warehouse transactions. Over the past ten years there has been substantial growth in the number of facilities that we advise on that have incorporated a cross-border component. In this Q&A we provide some market color on these facilities and respond to some of the most common questions that we receive from our clients.
What drives the need for cross-border warehousing transactions?
Many large commercial mortgage lending institutions have an international footprint. They are financing real estate in the U.S., Europe and other parts of the world. These institutions may therefore have a need for warehouse financing in the local currencies of the jurisdictions in which they lend, secured by collateral in those jurisdictions. In many cases, this requires having warehouse lines with local banking institutions in each jurisdiction either under New York law MRA documentation or English law GMRA documentation with separate terms aligning the security package, currency and floating-rate benchmark with local practice. Complicating matters, financing available in specific jurisdictions may not be on terms that are as accretive for the lending institutions as financing available in other markets like the U.S. or the U.K. There are, however, a number of multinational banking institutions that are positioned to offer relatively consistent terms for multiple jurisdictions across a single warehouse line under any number of local currencies, making it attractive for a mortgage lender to finance its multi-jurisdictional commercial mortgage lending operations.
What are the main benefits of having a single warehouse line under which funds may be drawn in various currencies?
There are numerous efficiencies to having multi-currency facilities. First, there may be significant savings in terms of money spent and internal resources invested in establishing and maintaining a single line versus numerous lines. Second, a single multi-currency facility provides substantial flexibility when deploying available capital as multi-currency lines often provide a single facility amount that can be drawn in any of the permitted currencies. If a warehouse borrower overestimates its funding needs in one jurisdiction or underestimates in another, the warehouse capacity can be easily shifted to finance loans in the jurisdictions where it is needed. Third, the points of contact among lender and bank are generally consistent across jurisdictions, aiding in ongoing administration and boarding of new assets.
What are the main challenges of executing a cross-border facility?
Cross-border facilities have several added levels of complexity as compared with single-currency facilities. They typically require involvement of counsel in different jurisdictions. In every jurisdiction the mortgage lender needs to understand the collateral, how to benefit from a perfected security interest, how enforcement works, as well as regulatory, tax and bankruptcy implications. Knowledge of local market conventions, security requirements, corporate formalities and opinion practice is crucial. It is common to see a legal team on these facilities that includes lawyers qualified in New York, England, Luxembourg, Germany and France, for instance. Few firms other than Dechert have the local expertise financing real estate assets across multiple jurisdictions necessary for seamless execution.
What are some common complications in dealing with foreign collateral?
Each jurisdiction in a cross-border facility may have materially different security perfection and enforcement formalities. Warehouse lenders will focus on minimizing any impediments to their ability to enforce their interest in a mortgage loan upon an event of default under the warehouse facility. For example, in some jurisdictions, mortgage loans need to be converted into a security (commonly referred to a “repack”) before they can be financed on a warehouse because of local lender licensing issues.
Tax structuring across jurisdictions may present other issues. Depending on the structure used, entering into a warehouse transaction could be viewed as a “tax event”, resulting in tax liability on both the initial purchase and the repurchase. Warehouse lenders will also be cognizant of laws which may view some forms of funding under a facility as conducting a lending business. Mortgage lending institutions may prefer to use Luxembourg or Irish entities on their cross-border facilities and their multi-national lending business to avoid potential U.S. tax implications for their non-U.S. investors.
Cross-border facilities must also reckon with structures that deal favorably with risk retention requirements which vary among applicable jurisdictions. For example, when dealing with counterparties subject to U.K. or European regulation, it is also important to consider whether the structure of the financing is likely to be treated as a securitization for risk retention purposes. Securitization structures may be subject the lender on the warehouse to different capital requirements and risk retention obligations while sellers on the warehouse may be required to produce additional reporting.
What level of asset-level diligence is required by warehouse lenders in connection with cross-border facilities?
The depth of asset level diligence requested by a warehouse lender is highly dependent on numerous factors. These may be informed by the granularity of the pool of assets being financed, the advance rate, the size of a particular advance, the term during which the asset is being financed, the amount of recourse, local customs and ultimately the warehouse lender’s preferences and internal requirements. We frequently provide guidance to our warehouse lender clients on their scope of diligence taking into account all of the foregoing factors.
