MIP13c3-SP4 Declaration of Intent & Commercial Points - Maker Governance Intends to Utilize an Off-Chain Asset Backed Lender to onboard Real World Assets as Collateral for a DAI loan
MIP13c3-SP#: 4 Author(s): Matthew V Rabinowitz (@mrabino1) Contributors: n/a Status: Request For Comments (RFC) Date Proposed: 2020-09-01 Date Ratified: <yyyy-mm-dd> --- Declaration Statement: Maker Governance Intends to Utilize an Off-Chain Asset Backed Lender to onboard Real World Assets into the Maker Protocol to borrow DAI and deploy in the “Real World”. Declaration to Replace: n/a
Context and Motivation
As the MKR protocol evolves and new collateral is being added to the portfolio that supports DAI, a direct need to diversify away from on-chain crypto assets and bring in uncorrelated “Real World Assets” presents itself (especially collateral that is backed with credit quality). Further, in addition to bringing stability, an economically motivated fiduciary and sound legal structure will add liquidity to the DAI ecosystem helping to tame the DAI price and use market forces to pull it towards its reference currency, the US Dollar. In doing so, a series of legal structures will be used to secure protections for MKR holders to allow the lending of DAI to LendCo (an off-chain asset backed lender). This DAI along with equity that LendCo has and will continue to raise will then be used to provide loans to willing Borrowers (“BorrowCo”).
MakerDAO desires to engage 6s, as an off-chain asset backed lender, to cause the addition of a new collateral type along with new roles that would need to be filled from a person(s) / entity nominated by MKR holders. As an off-chain asset backed lender, 6s would then engage the MKR community in a compliant way to execute a revolving credit facility loan agreement to help bring DAI loans to the “real world” to complement the business operations of 6s.
6s would then fundamentally, marry a revolving credit facility loan agreement and a trust. As a result, MakerDAO will need to create a new role (or expand the roles of others) of a “Maker Representative(s)” as a person and/or legal entity that needs to engage with the regulated Trust Company that will serve as trustee of the trust.
Please see the rest of this document for all supporting documentation, reference links and historic associated posts.
- Introduction to 6s
- How is this different?
- The Maker Representative
- The Legal Structure + Compliance
- Core Operative Documents
- Capital Flow
- Real World Asset module
- Why is this important?
- Time Horizon
- Legal Structure Selection
- 6s Capital LLC (“6s”) / Maker Community (“MKR”)
- Matthew Rabinowitz’s Bio
- Projects First in Line
- General Next Steps
Introduction to 6s
6s Capital LLC & 6s Capital Partners LLC (together “6s”), Delaware USA, along with any future international tax optimized feeder structures
6s works with multiple commercial real estate developers throughout the United States. Those developers build building that include a long-term lease. 6s provides secured loans equal to 100% Loan-to-Cost for construction and the underlying real estate acquisition until completion. Those buildings are customized (build-to-suits) and ground leases for Credit Tenant Leases.
-----Credit Tenant Lease
-------Single-Tenant Net Lease
Construction Time Lapse for an already-completed project - Sample
6s was born during the COVID-19 banking credit squeeze when its sister company, 6s Development LLC had challenges with banks no longer wanting to provide credit. The principals of 6s Development LLC have been doing Credit Tenant Lease development for 15 years and have built well over a thousand locations. 6s Capital LLC aims to permanently replace and ensure a future is built on a financial foundation of rock, not sand. None of the locations built by 6s Development has defaulted.
How is this different?
MakerDAO as a credit facility fundamentally provides credit in exchange for risk adjusted ability to foreclose on assets used as collateral. In this context, MakerDAO would be bringing on “Real World Assets” as collateral and in doing so, how liquidations would be caused / triggered needs to be adopted for this context.
Further, rather than a digital oracle to automate the decision of whether a “breach” has occurred that would then trigger a liquidation, 6s and MKR governance* would enter into a revolving credit facility agreement whereby the obligations / requirements / covenants are laid out in written form enforceable in a Court of Law (as opposed to purely numeric with a pricing oracle) or code.
Note: as MKR Governance cannot execute a legal document, MKR Governance will need to nominate one (or more) “Maker Representatives” to review the reporting from 6s to attest to the community whether or not 6s remains in compliance with the revolving credit facility agreement. This representative role will be an indemnified role.
The Maker Representative
- Represent the will and the rights of the MKR token holders and engage and instruct the Trust Company to be the Trustee of the Trust to which the Trustee then executes the revolving credit facility agreement and other documents with LendCo.
- Review and attest to the compliance of the revolving credit facility agreement to the MKR community.
- If also a legal entity, the Maker Representative Entity (“MRE”) and the TFE could be the same. Further, it is the TFE that will provide the actual DAI to the Trust.
Pursuant to the revolving credit facility agreement, 6s and MKR governance would agree on a set of reporting requirements that 6s would be required to deliver to a Maker Representative on a quarterly basis (with some spot inspection rights). Should 6s be in breach of the agreement, and all cures periods have expired, the Maker Representative would report this to MKR Governance and thereafter MKR governance would and should liquidate the vault and notify the Trustee to commence liquidation on 6s (which would then wind-down the affairs of 6s and sell any remaining assets). All proceeds would then be delivered to the beneficiary of the Trust, MKR holders, to repay the DAI loan.
The Legal Structure + Compliance
Compliance includes, but is not limited to:
* Annual audited financial statements of 6s
* Quarterly Independently reviewed financial statements
* List of all outstanding loans
* In construction
* Equity Requirement Reports per loan
The Maker Representative’s role truly will be to report on compliance of 6s and to cause the execution of the operative documents between 6s and MKR holders.
Further, and subject to MKR consent, a legal entity is recommended to also hold the role of a Maker Representative which may also be the Tax Favorable Entity (“TFE”) that is providing the DAI loan to the Trust, thus consolidating the two.
Subject to legal & tax requirements, verification, and MKR discussion, a Cayman Islands legal entity may be recommended.
Regardless of the jurisdiction, that Maker Representative Entity (“MRE”) would be the sponsor of the Trust and cause its formation and engagement with the Trustee, a regulated Trust Company. This Maker Representative Entity shall serve as an administrative role (e.g. paying bills / questions about MKR governance, etc). To ensure the MRE has only an administrative role, the trust agreement will include provisions to ensure that:
- Underlying trust agreement cannot be changed without a vote from MKR community
- Underlying trust agreement cannot cause a liquidation without getting direction from the MKR community from etherscan.io or vote.makerdao.com
- Underlying trust agreement allows that an MKR vote (vote.makerdao.com) can replace the MRE at its sole discretion.
As contemplated, the Trust should have minimal taxation as the TFE / Maker Representative Entity would receive the taxable interest income.
After the final jurisdiction of the TFE is determined, someone / somegroup in the community in collaboration with Matthew Rabinowitz and with local counsel will form the entity (or cause it to be formed). The TFE will explicitly not be run / owned / affiliated with LendCo or its officers.
Core Operative Documents
- Revolving credit facility agreement (between 6s and Trust for benefit of MKR holders)
- Promissory note and security documents (between 6s and Trust for benefit of MKR holders)
- Trust Agreement (between Trust Company, as trustee and MKR holders)
As this structure may exist for years or decades, a Trust company is being engaged to follow the Trust Agreement in the event of a 6s breach or MKR liquidation of the vault to ensure proceeds from the liquidation are held “in-trust” in favor of the beneficiaries of the Trust (which shall be the same smart contract as outlined above under how LendCo would repay its debt).
Diagram of Operative Documents and Flow
No data feed Oracle for this collateral type. However, the revolving credit facility agreement will have data reporting requirements that must be maintained to remain in compliance and keep MKR governance from liquidating the vault. The Maker Representative shall be the “trusted” interface between 6s and the MKR governance. Fundamentally, this reporting shall comprise an “analog oracle.” The foregoing notwithstanding, the 6s team will actively communicate with the community in addition to the Maker Representative.
Further, a Technical MIP is being submitted for review. Please see the reference section at the bottom of this document.
The Trustee (a regulated Trust Company) will follow the Trust Agreement established for this transaction. If given a liquidation signal from MKR governance, it will liquidate any and all assets pursuant to the trust agreement for the benefit of the trust beneficiary and deliver proceeds to pay down the Vault balance.
- Mint new DAI to TFE
- TFE lends DAI to Trust
- Trust lends DAI / USD to LendCo (1*)
- LendCo conduct lending operations and either repays the loans to the Trust or recycles the capital back into another approved scope transaction
- LendCo repays the Trust in DAI / USD (1*)
- The Trust repays the TFE
- The TFE repays the vault
Real World Asset module
The below structure contemplates FIVE fundamental levers that MKR governance can control to influence LendCo’s behavior:
- Aggregate Debt Ceiling
- Risk Premium - Interest Rate
- Scope (may be modified by MKR governance ratification of a LendCo request)
- Equity Requirement per LendCo transaction (may be modified by MKR governance ratification of a LendCo request)
Given the business operational needs of LendCo and the possible (if not likely) need to tweak parameters for the benefit of DAI stability, the frequency surrounding modifications should be on a weekly cycle with proper forum posts in advance.
Once the legal entities and legal contracts are in place, MKR Governance need only modify the five levers above to control / incentivize LendCo (regardless of how many BorrowCos are behind LendCo).
Why is this important?
This proposal for the community introduces a new market force to help stabilize the DAI ecosystem. Further, it is a natural counterbalance to helping push DAI to its reference currency, the US Dollar. By introducing an external economically incentived third-party, further liquidity will be added by using an approved “capital sink.”
- It is critically important that any DAI that overflows into this structure for Real World Asset Backed Loans, have the community’s pre-approval for credit quality.
- A “capital sink” or a “capital battery” in this context means a known holding “pool” for capital that has been / can be deployed with known credit in an approved structure.
By implementing legal structures that help secure the MKR holders from the “hit by the bus scenarios,” the DAI ecosystem will have an overflow value for excess DAI (when above $1) and a mechanism for encouraging repayment when below $1. In doing this, a needed dampening effect is created that will help smooth out the DAI price.
The above is achieved by using market forces and an economically motivated off-chain structure.
- Every time the market price is above 1, an economically motivated off-chain party should mint DAI to deploy off-chain. In reverse, when DAI is below 1, that same party should seek to repay the debt.
- When DAI is materially above 1, that party is well motivated to scale-up operations to deploy capital in-bulk.
- That capital could be held off-chain for weeks / months / years.
This proposal does not have a time restriction on how long the DAI will be borrowed by the TFE / the Trust / LendCo (1*). Rather LendCo is economically incentivized to respond to market forces and deploy / repay capital accordingly. As such, if the market conditions continue, the overflow DAI may be deployed (and recycled) off-chain for months / years.
This size of the overflow / capital sink is constrained by:
- Community approved debt ceiling
- LendCo operations (scope)
- LendCo economics
Legal Structure Selection
The combination of a bankruptcy remote Trust + an Operating LLC (as a Lender) is needed for a few essential reasons:
MKR holders are a collection of unknown people or legal entities that own MKR. A legal construct is needed to give them standing in a Court of Law. A Trust with MKR holders as beneficiaries meets this requirement.
Legal precedence with a bankruptcy remote Trust
- Most MBS / CMBS / ABS utilize a common statutory Trust for a similar purpose. In those structures, another “connected” trust issue securities to investors, this structure does not have that. It simply has MKR holders as beneficiaries of the Trust in the case of a liquidation.
- Industry familiarity with how to liquidate real-estate assets should a liquidation be triggered
- The Revolving Credit Facility Agreement is commonplace for most large companies to access inexpensive costs of capital from a bank. A bank does not need a Trust to foreclose on assets in the event of a breach / liquidation. For MKR, since those rights are held by an unknown group, a Trust (above) is needed
- Concentration of compliance and audit requirements to LendCo
Individually, a Trust structure is not new. The Revolving Credit Facility Agreement is not new. Pushing them together with MKR holders as the beneficiaries with an MKR community defined scope is novel.
As a result of the above, LendCo can borrow DAI / USD (1*) in significant scale without increasing the cognitive load on the MKR community / Maker Representative.
The independent accountants handle the scale of transactions while the auditors ensure the books are being kept in accordance with GAAP. The Maker Representative then needs to review the aggregate work done by everyone else to attest to the community that things are in compliance.
6s Capital LLC (“6s”) / Maker Community (“MKR”)
Matthew Rabinowitz’s Bio
Matt is an execution driven business strategy and corporate finance professional with overall responsibility for 6s Capital LLC including managing the financial resources (banking, financing, equity capital) as well as the financial service providers (accounting, audit, insurance and tax). He has run point on strategic planning / business development / creating strategic alliances / contract negotiation / SPV implementations & management including assisting in the overall strategy, negotiations and contract support for the large (~10GW) renewable energy consortium including Boone Pickens, Fluor Corp. BNSF Railways, ABB, and Siemens. Thereafter, he assisted in the overall strategy, negotiations and contract support for two Life Settlement Trust Certificate bond offerings. He co-managed for two private placement debt arbitrage pooled investment funds. To achieve the best pricing on debt securities, he co-founded and ran back office operations for both an SEC Registered Investment Advisor and a subsequently acquired FINRA Broker/Dealer. He co-managed an oil & gas SPV to acquire an operating oil field asset which was subsequently divested. Finally, he co-founded a commercial real-estate development firm and designed its corporate structure. Matt earned a Master in Business Administration from the University of Texas at Dallas and a Bachelor of Science in Electrical Engineering from Texas Tech University.
Projects first in line
The 6s team has identified two projects that have already cleared underwriting for financing after the above structure is put in place. Neither project has any construction / development risk. The two projects are both Ground Leases and have been “handed over” to the tenant. The Lease for each project is in force with the credit tenant on the hook to make rental payments with a store opening or date specific (whichever occurs first). No LOI or commitment to fund has been executed.
Transaction #1 Required Closing Proceeds: $3,700,000
- (Last Appraisal: $5,620,000)
Transaction #2 Required Closing Proceeds: $5,200,000
- (Last Appraisal: $7,140,000)
Both transactions will require refreshed appraisals prior to a possible closing.
Underlying Legal Documents
- Documents are still being drafted and will be posted in this thread prior to the deadline for the next governance cycle.
- Note: The Trust Agreement will use the form provided by the selected corporate trustee. As one has not been finalized yet, we will provide a basic template; however, until a trustee is selected the “actual” draft cannot be provided.
General Next Steps
- Declaration of Intent
- Community discussion / debate
- Formal submission of proposals for Governance cycle
- Inclusion of polls for proposals
- Governance poll for proposals
- Executive vote for proposals (including the Maker Representative(s)
- If accepted,
- the initial debt ceiling would be voted on but would be conditionally set to zero following the Maker Representative report (below)
- 6s team then deploys the structure contemplated herein alongside with the Maker Representative
- If accepted,
- Once the Maker Representative & 6s report to the community that all legal documents / entities are completely in place, a second executive vote would be held to implement the first debt ceiling as agreed in the first executive vote.
- With this final action, 6s would be able to borrow DAI pursuant the revolving credit facility agreement.
- MIP21: Real World Assets - Off-Chain Asset Backed Lender
- How MakerDAO can be a competitive lender in the Credit Tenant Lease marketplace
- Adding Real World Assets (“RWA”) as DAI collateral is a critical step for Maker to stabilize the peg... and in doing so, we change the world
- Translucent Finance - Off-chain lenders
- Economics behind Real World Assets ("RWA") - Part 1
- Economics behind Real World Assets (“RWA”) - Part 2
- FAQs based on commentary from the community
- CBRE - Q2 2020 Net Lease Investment
1* - At present, it is unknown if the Trustee will require direct engagement to provide the loans from the Trust to LendCo to facilitate each closing or not. Further, it is unknown if the Trustee will allow the conversion of DAI to USD to be done at LendCo or if they will require that they do the conversion with an account that is in their name F/B/O the Trust. This Declaration of Intent is giving latitude for adjustment surrounding the flow of DAI / USD to meet the requirements of the Trust Company to be willing to serve as the Trustee of the Trust.