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In the past decade, "asset securitization" – selling of securities and participation certificates backed by the cash flow a pool of financial assets, such as loans or leases -has revolutionized the manner in which businesses and Government enterprises have secured access to new sources of capital and lower financing costs. Asset Securitization provides an efficient way to sell performing and non-performing assets to investors, thereby, permitting the Government enterprises and the private business to recycle funds, to lower their cost of funds, to extend additional loans, to increase fee income from additional lending, and to receive income by servicing the securitized assets.


What is asset securitization?

This process involves the sale of securities (bonds, participation certificates) backed by the cash flow from a pool of financial assets such as loans or leases. Asset securitization has moved financing transactions away the traditional loans where the financial institution or Governmental entity extends the loan and holds the loan in its portfolio while collecting the monthly payments, to a structure where after the loan has been extended portions of the loans in the form of bonds or participation certificates are sold to a variety of investors. The most frequently used assets have been mortgage loan, residential leases, and loans and leases secured by an appreciating asset, to include the income stream from business and Governmental activity.

How does asset securitization work?

Typically, the business institution or governmental entity will transfer ownership of the assets into a trust or special purpose entity that is separate from the entity sponsoring the asset securitization. The trust or special purpose entity then issues securities or bonds that are backed by the assets. The assets then are held by the trust or special purpose entity for the beneficial interest of the securities holders. Frequently, the credit worthiness of the assets, such as the mortgage loans or the leases, is enhanced through one or more variety of techniques, such as insurance, or the way the transaction is structured. The risk associated with the assets is then shared among the numerous investors, with minimal if any risk being retained by the institution that sold the assets, unless the contract of sale provides to the contrary.

What are the benefits of asset securitization?

For some of the sponsoring institutions asset securitization may mean lower cost financing because the resulting securities may represent a better credit risk then the sponsoring entity itself. It may also permit the institutions to remove the related assets their balance sheets for financial and regulatory accounting purposes, and thereby free up capital that otherwise would be used to support the assets. The institution will gain access to new sources of capital and will be able to recycle such capital into new loans. Institution or Governmental entity may benefit from transaction related fees, such as servicing fees. In the United States, securities backed by residential mortgages make up in excess of US$ 4.6 trillion of the outstanding bonds. The volume of residential Mortgage Backed Securities to include leases totaled over US$ 850 billion in 1997. Other leases, auto loans, and other receivables totaled in excess of US$ 150 billion in 1997, while credit card receivables alone accounted for over US$ 100 billion.

What is the typical process in an asset securitization transaction involving mortgage loans and long term residential leases?

The institution sells the assets, in this case the mortgage loans, to the trust for an agreed upon price and under such terms and conditions as recited in the loan sale agreement. The securities are issued with whatever credit enhancement structure is required under the terms of the underwriting agreement. Such credit enhancement, in the case of a governmental entity, may include sovereign guaranties or repurchase agreements. As payments are received from the obligors monthly, by the party employed to service the loans, they are passed onto the investors after deduction of the applicable fees. In the event of default, the Servicer will pursue the collection activities. A seller of the loans may continue involvement in the transaction by acting as Servicer of the loans and thus receive compensation for that activity.


Pooling -

This format follows the traditional form of securitization of residential mortgage loans. It involves pooling a number of loans (typically of separate mortgagors and involving geographically diverse properties) and relying upon those large numbers to reduce the credit support otherwise required of individual loans.

Credit Leases -

This format typically is used where a tenant with a good credit rating leases one or more facilities under the concept of "triple net" leases.

Types of Credit Support Classes -

In this structure, junior securities provide the requisite credit support for more highly rated classes.

Bond Insurance and Letters of Credit -

An insurer may guarantee payments on the securities, or a letter of credit may be issued to support the issuer's credit.

Reserve Funds and Escrow Accounts -

Some credit risks may be protected through the use of reserve finds or escrow accounts that are either filly or partially when the securities are issued.


Debt Service Calculations –

"Stress" of anticipated cash flows by assuming high rate of defaults or a decline in the income stream meeting a "disaster” scenario.

Market Value Calculations -

"Stress" of property values to determine if decline in appraised value will impact substantially on ability to recover the debt. This is of considerable concern as in the event of default on the underlying obligation the sale of the security must be adequate to satisfy the obligation without a short fall.

Liquidity Reserve -

In addition to any credit support, some type of liquidity reserve will be required in order to ensure the timely payment of principal and interest to the bond holders. A highly rated Servicer willing and able to make advances in the event of a shortfall in the cash flow could be substituted.

Insurance -

Customary hazard insurance and general liability insurance also will be required. The claims paying ability of the insurance company will also be scrutinized.


The Loan Sale Agreement, Underwriting Agreement, Pooling and Servicing Agreement, and Trust Agreement are but a few of the agreements essential to the transactions. In addition the Trust and Trustee will require tax opinions to select the tax structure most beneficial to the bondholders.


We generally bill clients according to the work involved in a transaction plus actual expenses and charges, but we are happy to discuss alternative billing arrangements. Actual expenses are generally not contingent on the success of the transaction and such expenses will normally be specified in advance.


P3, LLC is a mature and experienced firm consisting of former high level United States Government executives with extensive experience in privatization and securitization transactions. Members of our group have acted as directors of privatization efforts with a number of U.S. agencies as well as lead counsels in major asset-backed issues. The members of our group understand what is involved in closing an asset securitization transaction and we are sensitive to the requirement to tailor the program to fit the needs of the business and the assets involved. We understand the assets -principally loans, mortgages, and leases -that are to be securitized. Having represented, as in-house counsel, U.S. Government institutions involved in the sale and securitization of their loan portfolios we are extremely sensitive to the concerns, apprehension and hesitation of the institutions as they prepare to embark in transactions needs that they have never experienced. We are well aware of what to be done to protect the institution's interests as compared to being concerned solely with closing the transaction. Our documents are designed to provide the maximum protection to the of the portfolio while minimizing risk to the entity issuing the securities.


We are of the opinion that the Team's experience in asset securitization transactions, which have become common in the marketplace in the nineties, will be of real benefit to those contemplating such transactions in the future.



By Tim S. McClain

Can you name the federal government’s second largest agency? Department of Defense (DoD) is number one by far, but which agency is the second largest? Department of Homeland Security (DHS)? Department of State? Here is a hint: It is the federal government agency that real estate developers who are looking for fresh opportunities should increasingly turn to as a source of new projects.

With over 230,000 employees and a budget approaching $80 billion, the U.S. Department of Veterans Affairs (VA) is the federal government’s second largest agency. It operates the largest integrated health care delivery system in the nation. The VA has more than 150 hospitals and 850 outpatient clinics under its jurisdiction; administers disability and other VA benefits; and, operates and maintains 122 national cemeteries.

Perhaps as impressive and of more relevance to real estate developers is the fact that the VA is one of the major property managers in the federal government. The agency administers and maintains approximately 32,527 acres of federal land and 5,306 buildings on approximately 300 sites. At the close of fiscal year 2005, the VA owned over 148 million square feet in buildings improving the properties it administers. Nationwide the cost to operate and maintain VA properties was in excess of $750 million.

As is the case with most property owners, buildings and assets are not always aligned with the business needs and demands of the enterprises that own them. Within a single large company, some business divisions may require more space while others have underutilized space. The same dynamic is true for the VA. Historically, approximately 5% of the VA’s real estate holdings throughout the nation (approximately 7,400,000 square feet) is vacant or underutilized. To address this issue, together with the fact that the VA has limited federal construction dollars to use to develop new facilities in areas where the VA requires additional space, in 1991 Congress authorized the VA Secretary to exercise what was termed as “Enhanced-Use Lease” (EUL) authority. The EUL program and the VA’s corresponding authority to enter into enhanced-use leases are contained in the federal statutes at 38 U.S.C. §§ 8161 – 8169. The EUL authority, which was recently extended to 2011, permits the VA to realign its underperforming properties to produce a positive return for veterans and the American taxpayer. A few other federal agencies have similar authorities.

The EUL program presents an opportunity for builders and developers to partner with local VA facilities in what has become a win-win situation for both parties. A developer receives access to a piece of desirable property for a lease term of up to 75 years and the VA receives something in return that “enhances” its mission of serving veterans. The EUL program also presents an opportunity for creative financing schemes including various public and private funding arrangements.

Here are a few examples of VA’s recent and successful EUL transactions:

• Minneapolis, Minnesota – Single Room Occupancy (SRO) (2005): VA awarded an enhanced-use lease of approximately 4.341 acres of land on the VA Medical Center campus to a developer for the construction of not less than 140 residential units in 2 existing VA buildings. The developer is responsible for the financing, design, construction, renovation, operation, maintenance, and provision of services at the facility.

• Leavenworth, Kansas – Mixed-Use Development (2005): VA signed an enhanced-use lease with a developer to renovate 38 underutilized buildings and to adaptively reuse historic properties located on approximately 50 acres of land.

• Chicago (Lakeside), Illinois – Realignment (2005): The VA signed a 75-year enhanced-use lease with Northwestern Memorial Hospital (NMH) for two parcels of land totaling 3.8 acres. VA realized $28 million upon lease signing, and another $22 million upon the property’s ultimate transfer to NMH under the VA’s disposition authority.

• North Chicago, Illinois – Energy Phase 1: In 2002, VA entered into an enhanced-use lease with a trust that secured a developer to construct, operate and maintain a state-of-the-art energy center that produces and sells energy to VA. In return, VA received energy cost savings.

The VA’s enhanced-use leasing authority offers developers an opportunity to partner with the VA to maximize the value and productivity of the VA’s extensive real estate holdings, yielding real estate projects that can be financially beneficial to both the developers and the VA. However, transacting with any governmental authority presents a multitude of challenges that differ from those typically involved in a private sector real estate transaction. Real estate companies seeking to do business with the VA should consider engaging an expert that understands not only the VA’s EUL authority, but also the other nuances involved in doing business with the VA.

*Tim S. McClain is a member in P3,LLC, a consulting firm specializing in public-private partnerships, and served as the General Counsel for the U.S. Department of Veterans Affairs in Washington, DC for five years.



ARGONNE, Ill. (Dec. 4, 2007) – The U.S. Department of Energy's (DOE) Argonne National Laboratory announced today that a new Theory and Computing Sciences Building will be constructed at the laboratory, solidifying the fastest growing research program in its history.

"From its very beginning, computing has been an aid to the advancement of science; however, somewhere along the line there was a sea change," said Michael Turner, Argonne's chief scientist.  "Computing is no longer just an aid, it is essential to almost every aspect of science and engineering across all disciplines. By focusing on the most challenging problems, this facility will enable breakthroughs across the broad frontier of science and engineering, benefiting both science and society.  While we can imagine some of the breakthroughs that will come early on, we can only dream about those that will come over the long lifetime of this facility."

Located on the boundary of Argonne's secure perimeter, the approximately 200,000-square-foot facility will be home to more than 600 laboratory employees and will house research groups using one of the fastest computers—the IBM Blue Gene/P—to answer huge scientific questions.

"The research enabled by the TCS building will touch many areas of science and society—from research in astrophysics and nuclear reactor design to searching for cures for Parkinson's disease and better drugs to fight antibiotic-resistant staph infections such as MRSA to long term climate and ecosystem simulations and to a better understanding of the global carbon cycle which underpins global climate," said Rick Stevens, Argonne's associate lab director for computing and life sciences. "Through this new facility and through key partnerships, such as the Computation Institute, a joint endeavor with the University of Chicago, we will make headway in advancing computer science and the important application fields of today, and of the future."

Additionally, the facility will include an 18,000-square-foot centralized library, computational research labs and a conference center.

The Illinois Finance Authority has issued economic development bonds that will provide financing for the project to a Delaware Statutory Trust, as part of a unique public-private financing and leasing agreement. By allowing private sector market forces to bear strongly in this process, this new facility should save the government more than $10 million in life-cycle costs.

Under the terms of the arrangement, thought to be the first of its kind, DOE will lease the land to the trust. The trust will hire a designer/builder.

"We have worked diligently with our colleagues in the Department of Energy to leverage the economics of this innovative model of federal, state and private sector cooperation to best serve DOE's scientific mission requirements," said Argonne Director Robert Rosner.

Argonne National Laboratory seeks solutions to pressing national problems in science and technology. The nation's first national laboratory, Argonne conducts leading-edge basic and applied scientific research in virtually every scientific discipline. Argonne researchers work closely with researchers from hundreds of companies, universities, and federal, state and municipal agencies to help them solve their specific problems, advance America 's scientific leadership and prepare the nation for a better future. With employees from more than 60 nations, Argonne is managed by UChicago Argonne, LLC for the U.S. Department of Energy's Office of Science.

For more information, please contact Steve McGregor (630/252-5580 or media@anl.gov ) at Argonne or Brian Quirke (630/252-2423 or brian.quirke@ch.doe.gov.

For additional information on the financing-leasing arrangement, contact:
    •  Anatolij "Tony" Kushnir, Partner, Simmons & Kushnir LLP at 202-293-3717 or
    •  Michael Simmons, Partner, Simmons & Kushnir LLP at 202-293-3716 or

For information on the construction project, contact:
    •  J. Michael Yurkovic,TCSB Trust Development Project Manager, at 312-925-7035.

For information regarding State support, contact:
    •  Diane Hamburger, Illinois Finance Authority, at 312-651-1364 or dhamburger@il-fa.com



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