[REIF-DROP] MIP6 Application: REIF DROP: Commercial Real Estate Assets
This MIP6 Proposal will finance a special purpose vehicle (“SPV”) called REIF Pool LLC. (“REIF Pool” or the “Issuer”), a Delaware limited liability company, established by REIF Financial Investments Inc. or affiliates thereof (“REIF” or the “Sponsor”) to acquire commercial real estate backed loans. The first loans will be originated by Forge & Foster Investment Management Inc. (“Forge & Foster”, “F&F”, or the “Initial Asset Originator”). Upon acquisition of each loan, the Issuer will be the legal owner of the assets and will hold the title to the asset.
1. Who is the interested party for this collateral application?
The Initial Asset Originator, Forge & Foster Investment Management Inc. has a 14+ year track record of successfully investing in commercial real estate in the Greater Toronto Area and currently has Assets under Management (AUM) in excess of $230M CAD. The partners are made up of ex-Canadian Pension Plan Investment Board members including the former Managing Director and Head of Real Estate for the European Office.
The Sponsor, REIF Financial Investments Inc., is represented by Ben Ames, the Chief Executive Officer of REIF. In a previous role, Ben Ames led acquisitions and dispositions of over $150M in real estate investments. He increased assets under management of his fund from $15M to $150M in 4 years. Ben has a B.Comm in Management Economics from the University of Guelph. The Sponsor is wholly-owned by Corl Financial Technologies Inc., an existing asset originator for a pool on Centrifuge.
Centrifuge provides the technology and framework for bringing real-world assets to Multi-Collateral Dai (“MCD”). The main contact on Tinlake for the application is Colin Cunningham ([email protected]) as well as Michael Serunian ([email protected]).
2. Provide a brief high-level overview of the project, with a focus on the applying collateral token
REIF, the Sponsor, intends to establish relationships with a number of trusted and reliable asset originators across North America with the intent of supplying risk capital to finance and obtain loan assets backed by commercial real estate. These assets are expected to yield above-market risk-adjusted returns and bear material collateral coverage to protect the assets from downside risk.
With the Initial Asset Originator, the REIF Pool will help finance value-add commercial real estate projects with an average loan amount of $10,000,000 (ten million) for the 1st position product and $500,000 (five hundred thousand) for the 2nd position product. The 1st position product is for acquisition, equity takeout, and refinancing of commercial real estate loans. The 2nd position product is for renovations, development, or leasehold improvements of the properties. The property types are classified as “Commercial” and “Industrial” properties. The maximum Loan-to-Value (LTV) leverage to be considered for financing of the 1st position product is to be 70% of the asset value and the maximum LTV leverage to be considered for financing of the 2nd position product is to be 80% of asset value. The asset values will be verified by a third party. F&F conducts legal checks on the property titles, and ensures the registration is accurate and proper insurance is in place on all properties prior to financing. The term of the loans will be 12 and 24 months as determined on a case-by-case basis.
In the below example you can see what a REIF 1st or 2nd position loan would look like in the capital structure:
Acquisition & Development Structure Example
- Acquisition Price $ 9,500,000.00
- Closing Costs $ 500,000.00
- Development $ 800,000.00
- Carrying Costs $ 100,000.00
- Total Required $ 10,900,000.00
- 1st Position Loan - REIF/Other Financial Institution $ 7,500,000.00
- 2nd Position Loan - REIF/Other Financial Institution $ 900,000.00
- F&F Investor Capital $ 2,000,000.00
- F&F Capital $ 500,000.00
- Total Capital $ 10,900,000.00
Distributions & Waterfall
- Repay 1st Position Loan
- Repay 2nd Position Loan
- Return of Investor Capital
- 10% hurdle to Investors per annum
- F&F catch-up
- Remaining amount 50/50 split between F&F Investors and Forge & Foster
Skin in the Game
There are numerous ways in which F&F and REIF will share risk and align incentives to ensure all parties are economically aligned to preserve and grow capital in the REIF Pool.
Firstly, REIF, the Sponsor, expects to launch the pool with 2 million Dai of committed private capital as a blended investment in the DROP and TIN. REIF also expects to make additional purchases of DROP and/or TIN to grow the size of the pool over time.
Secondly, F&F, the Initial Asset Originator, is committed to investing alongside the REIF Pool in all of the commercial real estate properties that F&F offers to the REIF Pool to finance. The anticipated F&F investment is a minimum 20% of the equity of each property. This investment is considered first-loss capital and will absorb any losses to protect the debt assets in the REIF Pool. This further aligns the incentives of F&F with the REIF Pool.
Furthermore, REIF and its affiliates are committed to acquiring a material portion of the senior and/or junior tranche of the pool offered by the Issuer, the specific proportion and amounts have still yet to be determined.
REIF Financial Investments Inc. formed REIF Pool LLC., an SPV, for the acquisition of the commercial real estate backed loans. REIF Pool will enter into a service agreement with Centrifuge using Centrifuge’s open and decentralized infrastructure. REIF Pool will tokenize the titles of each of its commercial real estate backed loans into NFTs and will add those NFTs to Tinlake as collateral. REIF Pool will utilize Tinlake to issue REIF-DROP and REIF-TIN backed by the pool of NFTs that are locked in Tinlake. REIF Financial Investments Inc. will purchase the REIF-TIN tokens and will lock the REIF-DROP tokens into a MakerDAO Vault. Please find the documentation of the two-tranche structure here.
REIF has structured the pool to reflect a maximum 90% and minimum 10% allocation to DROP and TIN, respectively. We structured the pool to ensure that there is sufficient coverage from TIN for the DROP tranche based on the average asset size, pool size, and risk profile of the assets.
3. Provide a brief history of the project
REIF Financial Investments Inc. is a newly formed entity wholly owned by Corl Financial Technologies Inc. and designated to facilitate the issuance of commercial real estate loans to mid-market private investment managers in North America. The first investment manager and Asset Originator that REIF has agreed to work with is Forge & Foster.
About Forge & Foster
Forge & Foster was established in 2016 by brothers Mark and Joe Accardi. Since then, they have amassed over $200 million in assets under management with ~2,000,000 square footage across 40 commercial real estate properties. Forge & Foster deploys a value-add investment strategy towards commercial real estate by acquiring high-growth incoming-producing properties with targeted returns of 20%+ IRR over 3-5 year investment periods. Predominantly investing in Toronto, Canada and the surrounding area, Forge & Foster has an in-house team of 5 partners and 15 employees with capabilities in deal sourcing, asset management, financing, capital raising and property management. Forge & Foster also has an advisory board of 5 members. For more information, please visit www.forgeandfoster.ca.
Corl Financial Technologies Inc. (“CFT”) is a financial technology company that operates a Lending-as-a-Service (“LaaS”) platform that collects private data on businesses and recommends financing decisions. Since 2016, Corl has helped government agencies and corporations effectively source and analyze financial data for financing over $100 million in business loans, and helped support dozens of businesses obtain growth capital without giving up ownership or control.
Centrifuge has built a technology solution for businesses such as REIF to use their assets as collateral and turn them into fungible ERC20 tokens and borrow money against them through DeFi protocols. With Tinlake, Centrifuge has over 30M DAI locked in a number of different asset pools since the launch of v3 at the end of October and deployed capital from over 100 real people around the world. We’ll work closely with the RWA working group to realize its mission to scale RWAs in MCD to $300M in 2021.
4. Link the whitepaper, documentation portals, and source code for the system(s) that interact with the proposed collateral, and all relevant Ethereum addresses. If the system is complex, schematic(s) are especially appreciated.
Technical documentation about Tinlake can be found here: https://github.com/centrifuge/tinlake
Maker specific implementation here: https://github.com/centrifuge/tinlake-maker-lib
5. Link any available audits of the project. Both procedural and smart contract focused audits.
Centrifuge has conducted several audits of its technology stack. The audits can be found here: https://github.com/centrifuge/security/tree/master/audits
6. Link to any active communities relating to your project.
7. How is the applying collateral type currently used?
The SPV will be financed by issuing DROP Tokens for 90% of the net asset value of the pool of NFTs plus cash on hand (collectively “Pool Valuation”) and TIN Tokens for 10% of the Pool Valuation.
Upon the repayment of the loans, the Issuer will repay the outstanding balance drawn against the NFT and accrued interest thereon. All of the assets in the pool will be financial instruments with commercial real estate collateral and will share similar risk characteristics.
The Issuer looks forward to discussing how DROP Tokens can be used in partnership with MakerDAO.
The Issuer will directly own the following security and not be liable to the parent entity in the case of default at the parent level.
The following security shall be in a form and content satisfactory to the Issuer:
- 1st or 2nd charge over the property for the full amount of the loan and all the interest costs and fees payable under the Loan;
- A 1st or 2nd in priority general assignment of the Borrower’s interest in all present and future leases and rent payable for the Property;
- A 1st or 2nd in priority General Security Agreement on the Borrower’s chattels, equipment, assets, and undertaking with respect to the Property.
The Issuer is responsible for collection and handling of all default procedures and collections. Default procedure is outlined as follows:
Notice of default is sent to the borrower. Limit of non-payment at two (2) times throughout the duration of the loan term
Borrower has 5 business days to either:
- Provide payment in full
- Construct and receive Issuer Approval of a loan workout program. Any defaults of the loan workout program immediately trigger foreclosure.
- In the event the borrower is unable to make payments on the existing agreement or a loan workout program, a foreclosure process is initiated and will involve a power of sale. Power of sale procedure is as follows:
- Notice of power of sale is served. Redemption period of 37 days commences.
- After 37 days, issued a statement of claim for the outstanding debt and possession of the property.
- Over the next 20 days, the owner has the option to file a statement of defence. Following that 20 day period, the Ontario Provincial Courts shall grant the Issuer with the ability to list the property for sale to recollect on the outstanding debt and outstanding fees.
- The property will be listed for sale by a reputable real estate brokerage with significant resources and understanding of the asset class.
- The sale process can take between 2-10 months.
8. Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?
REIF has incorporated REIF Pool LLC., a Delaware (USA) limited liability company (the special purpose vehicle, “SPV”). This SPV has been formed to finance and acquire assets from various Asset Originators.
This SPV structure creates a bankruptcy-remote entity whereby owners, debt holders or interested parties of this newly created SPV are left unaffected by the parent’s financial, operational and/or legal health.
9. Where does exchange for the asset occur?
The SPV enters into a subscription agreement with lenders who receive DROP from the SPV in turn for providing DAI. The DROP token can be redeemed against the cash flows of the underlying collateral directly from the SPV by any DROP holder. This is ensured by the Tinlake smart contracts and is the primary way for interacting with these tokens.
10. (Determined by Legal Domain Team) Has your project obtained any legal opinions or memoranda regarding the regulatory standing of the token or an explanation of the same from the perspective of any jurisdiction? If so, those materials should be provided for community review.
First, the issuance of DROP and TIN tokens is handled via Securitize, with AML/KYC procedures and compliance with US securities guidelines. Investors based in the US must be accredited investors (generally defined as having a net worth of at least $1 million).
The offering structure overview and legal templates can be found here 1.
11. (Determined by Legal Domain Team) Describe whether there are any regulatory registrations for the token and provide related documentation (including an explanation of any past or existing interactions with any regulatory authorities, regardless of jurisdiction), if applicable.
The issuance of DROP and TIN tokens is handled via Securitize, with AML/KYC procedures and compliance with US securities guidelines. Investors based in the US must be accredited investors (generally defined as having a net worth of at least $1 million). The SPV issues DROP tokens for the Maker vault, and Centrifuge will post legal discussion about potential implications for Maker.
12. (Optional) List any possible oracle data sources for the proposed Collateral type.
Determining the correct price of a real-world asset behaves differently from pricing Ethereum native collateral tokens. In order to adequately price a real estate-backed loan several factors must be considered. Tinlake requires not just an accurate price of the overall pool but details on a loan-by-loan basis. As these form the basis as well for the DROP token, we will start outlining the pricing for those first:
In approving real estate loans, REIF employs a strict due diligence process and ensures the following are provided and understood:
- Property Value. REIF will rely on a 3rd party verification of property value.
- Loan to Value (LTV) not to exceed 80% of the asset for 2nd position loans and 70% for first position loans.
- Use of Funds. The Value-Add loans are only for activities that directly increase the value of the property. This restriction allows for take out financing at a higher value once a project is completed and allows the Issuer to monitor the deployment of funds effectively.
- Entity in Good Standing. Issuer to ensure current debts and obligations are in good standing and verification of no liens against the asset.
- Corporate Docs & Financials. Issuer ensures the ownership has sufficient financials to service the Value-Add Loan.
- Insurance. Adequate insurance for the project and insurance of the existing asset is required. Issuer is outlined as a Loss Payee on the file.
- Covenants. The Borrower shall not further encumber, charge or mortgage the asset without the Issuer’s written approval.
- Property Income. The Issuer will underwrite the existing income of the property and future income of the property to ensure 1. The originator can service the mortgage payments and 2. that the future income will yield a high enough value upon completion to pay out the Value-Add Loan.
13. (Optional) List any parties interested in taking part in liquidations for the proposed Collateral type.
The North American Commercial Real Estate Market is one of the largest real world asset markets in the world with over $136.7 Billion USD of Multifamily, Office, Industrial and Retail properties changing hands in Q2 of 2021 alone¹. There is a diverse marketplace of Brokers, Investors, Corporates and other entities that REIF would be able to transact with in the event of a liquidation. REIF has a large network of other investors who operate in the same property markets. REIF is confident in its ability to structure buyouts in the event REIF has a need to liquidate assets.