Innovation Trio: SwapRent, FARJHO & TARELV

Shared Appreciation through Shared Cash Flows – the New Economic Owning, Renting and Own-Rent Switching Concepts as well as Business Methods for Managing Real Estate Properties –

03/15/2010 Commercial property applications of SwapRent and PELM – Shared appreciation through shared cash flows

Although the SwapRent related efforts were originally designed for both residential and commercial properties, due to the housing related residential mortgage crises, so far most of the attentions have been focused on developing applications primarily from a residential property owner’s perspective. The application opportunities are indeed equally available for commercial property owners to enjoy similar economic benefits.

Now that the commercial real estate property market has started to crack after the residential shoe has dropped two years ago, it would appear to be a very good timing to launch the SwapRent services to mid sized regional banks to assist them with managing their distressed loan portfolios on commercial properties again. It may make sense to revisit these services to the commercial real estate investors and distressed mortgage assets holders.

The key concept to help the distressed banks get these legacy assets off their books is to promote the arbitrage trading by sophisticated investors to buy these assets on the cheap, fix it up by making value added efforts to increase the value of these legacy assets through effective innovative foreclosure prevention and loan loss mitigation methods, similar to what could be done on the distressed residential mortgage assets.

To borrow the simple analogy again, if the buyer of a fixer-upper dilapidated property is doing nothing to fix up the run down property he bought (i.e. fixing the leaking roof, doing a new paint job, etc.) he would not be able to sell it at a higher price to others in order to make a trading profit on the investment by simply sitting on it, hoping for a price turn-around at a very expensive monthly carrying cost.

As an example, a shrewd investor could first act as the “economic landlord” to offer monthly payment assistance to commercial property owners in exchange for a part of the future appreciation of their properties. The property owners who may want to receive monthly subsidy assistance could be any types of property owners such as offices, retail shops, industrial buildings, hotels and apartment complexes, whether with good credit, income potential or not, as the pricing will automatically reflect the riskiness for the investors. These opportunities should not be restricted or directly only to the distressed property owners only so that these new services will operate under a pure free market mechanism. When employed by speculative investors, it may create the natural demand for buying interests that may further boost up the commercial property market value.

Through the new “temporary own-rent switching” or “economic renting” concept as facilitated by the SwapRent contract and its related mortgage product PELM (Property Equity Locking Mortgage), property owners could have much more flexibility in partial owning and renting and for different maturity terms in a SwapRent contract, e.g. he could decide to only do a 25%, 50% or 75% temporary own-rent switch and therefore share only 25%, 50% or 75% of future appreciation of the property by receiving only $25,000, $50,000 or $75,000 monthly assistance from the investors for various maturity terms, … etc.

In effect, the objective of shared appreciation with other investors could be easily accomplished through shared cash flows received from the same investors via the quantitatively precise SwapRent contracts traded at

The business opportunity to derive more short term trading profits for distressed asset fund managers and speculative investors is to trade distressed trust deeds or CMBS by adding value through offering the new SwapRent loan workout program to the property owners directly.

As a very simple example, after buying the distressed trust deeds or CMBS at deep discounted prices (say 30 cents on the dollar), by offering a $25,000, $50,000 or $75,000 monthly subsidy through the SwapRent contracts to a distressed property owner, depending on his/her particular need, in order for the commercial property owner to have enough monthly subsidy to hang on to his/her property, an investor or current holder of the trust deeds could get to avoid an expensive foreclosure.

Once the SwapRent transaction is executed with the property owner, the value of the distressed trust deed notes will recover immediately once the uncertainty of potential defaults/foreclosures is removed by closing the SwapRent deal with the property owners, at least for the next 2, 3, 5, 7 or 10 years (whatever maturity term of the chosen SwapRent contract).

The investor could then immediately re-sell these worked-out trust deed notes back to other longer term fixed income institutional investors to realize a handsome short term trading profit (say selling at 80 or 90 cents on the dollar). This is because by closing the deal on the SwapRent contact with the commercial property owner directly, monthly cash flows will be provided to the lender directly (or through a PELM), he/she would have turned the non-performing asset that he/she owns into a performing asset before re-selling it.

After realizing the short term trading profits on the trust deed already, the investor could also resell these SwapRent contracts (the equity piece, so to speak) which retain the financial value of the future appreciation potential of the underlying commercial property to other free market investors through to get the money back in order to recycle the capital for the next investment opportunity or to simply put the SwapRent contracts in his/her drawer and wait for the future appreciation of the underlying commercial property.

The point is that chances are they may have already made enough money from the short term arbitrage trading of the distressed trust deed notes or CMBS, whether or not they could further make more money on this equity piece might not have been an important motivating factor for them to initiate the transaction to begin with. The much larger short term trading profit has already been realized on the trust deed notes. That would be what matters most to these short term traders. The carrying cost of holding on to the SwapRent contract is very low anyway as it was specifically designed as a stream of small monthly cash flow commitments made out to each property owners that is usually spread out throughout the life of each of the SwapRent contract.

Filed under: Uncategorized






%d bloggers like this: