Beginning in 2014, collateralized loan obligation transactions (CLOs) consisting of underlying pools of commercial real estate mortgage loans (“CRE loans,” CLOs of CRE loans, “CRE CLOs”) re-emerged as a financing alternative for sponsors of platforms that originate CRE loans. The purpose of this article is to describe some of the key structural features of post-crisis CRE CLO transactions (CRE CLO 2.0) and how they differ from pre-crisis CRE CLO transactions (CRE CLO 1.0). Also, because all commercial mortgage-backed securitization (CMBS) transactions, including CRE CLOs, must not be subject to entity level taxation, we discuss some of the current tax issues to be considered by the parties involved in structuring such transactions.
Background
CRE CLOs first emerged in 2004 and were structured using the same rating agency methodologies as those that were then in effect for collateralized loan obligations of high-yield corporate loans. Like corporate loan CLOs the vast majority of CRE CLOs are sponsored by asset managers that enter into arrangements with offshore entities formed in the Cayman Islands to manage a portfolio of debt instruments. In order to fund the acquisition by CLO issuers of the portfolios of debt instruments selected or originated by sponsors or their affiliates, arranging banks are hired by sponsors to work with the rating agencies, law firms and other deal parties to structure CLOs and offer the CLO debt securities to U.S. investors pursuant to Rule 144A under the Securities Act of 1933 (the Securities Act) and to non-U.S. investors pursuant the safe harbor provided Regulation S under the Securities Act. The equity securities in a CRE CLO are generally held by an affiliate of the sponsor as described below.
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