While many commercial real estate market segments have been plagued by uncertainty (see retail and hospitality) or changing demand (see office), the enthusiasm for industrial and light industrial real estate assets has only been increasing, with surging valuations to match. Net market absorption for industrial assets hit 425 million square feet for the 12 months ending September 30, 2022, and the sector has the lowest vacancy rate at approximately 4%.

This increasing demand, driven by e-commerce and the accompanying need for logistics and distribution hubs, has caught the attention of many REITs and other real estate funds traditionally focused on other market segments.

As these funds grow their portfolios, customary commercial mortgage real estate lending becomes more and more cumbersome and alternative financing structures become more attractive.

One option for owners growing their industrial portfolios is to consider a collateral pool (or unencumbered pool) credit facility. These facilities feature facets of both corporate (specifically, asset based lending) and real estate finance, making their structure flexible but somewhat complex to inexperienced market participants.

Depending on the nature of the borrower/sponsor, these pool facilities may be mortgage secured, equity pledge secured, or unsecured, and may include full or limited recourse to a sponsor entity or principal.

Deal structure is ultimately dictated by the “creditworthiness” of the sponsor — a lender’s calculation of their experience, assets included in the pool, balance sheet, and fund size — along with the sponsor’s appetite for more restrictive pool requirements and tighter financial covenants.

Typically larger and more sophisticated REITs and funds will have access to unsecured facilities supported by a pool of unencumbered assets; whereas newer players, smaller funds, or funds targeted at riskier asset classes may only have access to pool securities secured by mortgages on the underlying real estate assets, or pledges of the sponsor’s equity interests in those assets (similar to a mezzanine loan — and sometimes referred to as a “lightly secured pool”).

This article will explore certain peculiarities of pool facility deal structure, contrast secured and unsecured facilities, and discuss the diligence and documentation necessary to be performed by a lender or sponsor’s counsel at and after closing.

Read the article on Westlaw Today below.