Real World Assets – CTL Document Roadmap – Getting started v1

Getting Real World Assets on Maker is an essential path to stabilize the DAI peg. Doing so is not trivial, not for the faint of heart, but completely achievable. 

 

After some of my recent posts related to my initiative and contemplated structure and objectives, I have had several chat sessions and several calls with folks that want to understand the structure and have me address their "gaps".

 

Timing:

We could implement the below **tomorrow** subject to MKR approval less the Trustee (a regulated Trust company) which is a critical component. Further, the legal enforceability opinion of the Trust Agreement to which the Trustee will rely upon takes time and money.

 

Knowing that this structure will be duplicated by those that come after me, I want to do this right.  Bulletproof. Skipping the Trust company is easy but 100% NOT recommended. After-all, they are guarding the rights of all MKR holders if LendCo (mine or any other participant that uses the same structure after me) goes into liquidation. They hold those rights literally "in trust".

 

We should ALL demand an exceptional HIGH standard for any participant that wants to deploy DAI off-chain. While throttled with a debt ceiling, that participant becomes a trusted conduit to the real world. How does LendCo earn and maintain that trust? Reoccurring compliance reporting to start. 

 

Reporting Requirements

AKA, the analog oracle. Fundamentally a reoccurring compliance check to ensure no nefarious activities and doing what you said you would. So, quarterly reporting to a MKR approved arresting party to confirm compliance of the Revolving Credit Facility Agreement in a translucent way. Most notably is the requirement to get LendCo an annual audit. NOTE: This audit has / will have the same scrutiny as every publicly traded company. If you have never done one, they want to know EVERYthing. They are attesting to the quality of the books and being in accordance with GAAP. 

 

It is a complete "red-flag" if a LendCo cannot get a clean annual audit or worse, just doesn't volunteer even doing one at the beginning.

 

As an MKR holder (personally), we MUST set the bar for all Real World Asset LendCos very high to start. If we are going to do it, we must get it right to start with. For me, this is just how I operate and “do” business. 

 

I want to grow LendCo into a capital sink with credit backed principal preservation thesis with significant assets. An annual audit is just simply mandatory. 

 

Below is the practical guide for all of the documents needed for off chain commercial real-estate.

 

------

 

Intention: To replicate a bankrupt-remote legal structure similar to those used in asset-backed financing, but with the Maker Protocol instead of a bank or private debt capital.

 

Setup (entities):

• Borrow Co.

• • • Delaware LLC, desires to borrow money from Lend Co. for specifically approved uses as outlined in Loan Agreement

• Lend Co.

• • • Delaware Series LLC, raises its equity capital from Private Investors and its debt capital from Credit Facility Participants [Maker Vault] There will be an acceptable ratio of debt to equity.

• Trust

• • • Delaware Statutory Trust, a trust formed for the benefit of the Credit Facility Participants [Maker Vault]  to hold assets to be loaned to Lend Co. which are secured by real estate collateral pledged by Lend Co.  All of the rights of the  Maker Protocol against Lend Co. and to the collateral are held in the Trust for the benefit of the Credit Facility Participants [Maker Vault].  T

• Trustee

• • • The trustee acts for the Trust.  It will be a regulated Trust Company (likely under Delaware law), acts as a reputable independent party who will execute its duties as set forth in the Trust Agreement between the Trustee and the Maker Representative.

• Maker Representative Entity (elected and authorized by governance to carry out specific duties)

• • This entity (or individuals) is the contact person between the Credit Facility Participants [Maker Vault] and the Trustee and signs paperwork 

 

Setup (agreements):

 

Borrow Co. <> Lend Co.

• Loan Agreement

• • • The agreement between the Borrow Co. and Lend Co. in which Lend Co. agees to loan money to Borrow Co, under specific conditions payment terms, limitations, use of proceeds, and other general covenants 

• Promissory Note

• • • This is the document that evidences a loan was made.  It outlines the explicit payment terms, amount to be repaid, and the interest rate 

• Deed of Trust (or) Mortgage (or) Security Agreement

• • • First position lien against Borrow Co.’s specific assets being pledged as collateral in compliance with Uniform Commercial Code-1 [UCC-1]

• Assignment of Rent and Profits

• • • Allows Lend Co. to directly capture the income coming from the tenant that has signed the lease with Borrow Co. and represents the income stream being relied on for the loan 

• Equity Pledge

• • • Pledges the equity of Borrow Co. to Lend Co. in addition to the specific assets being pledged and allows Lend Co. to take control of Borrow Co. in an event of default  

• Environmental Indemnity

• • • Borrow Co. agrees to indemnify Lend Co. against any environmental contamination of the property if need be 

• Engineering Consent

• • • Allows for Lend Co. to step into Borrow Co.’s position in directing engineering work on the project if need be 

• Architecture Consent

• Allows for Lend Co. to step into Borrow Co.’s position in directing architectural work on the project if need be 

• General Contractor Consent

• Allows for Lend Co. to step into Borrow Co.’s position in directing general contracting work on the project if need be 

• Subordination Nondisturbance Attornment Agreement [SNDA]

• • • Agreement between tenant, Lend Co., and Borrow Co. that allows the tenant to continue to operate in the event of a foreclosure 

• Completion Guarantees

• • • Assurances provided by Borrow Co. and Borrow Co.’s Principals in favor of Lend Co. (there is personal recourse against the Principals should the project go unfinished)

• Bank Account Control Agreement

• • • Allows Lend Co. to confiscate any capital in Borrow Co.’s bank account in the event of foreclosure 

• Misc. Closing Documents

• • Closing legal opinions
  • Closing certificates
  • Title policy

 

Lend Co. <> Trust

• Revolving Credit Facility Agreement between the Trust as lender and the Lend Co. as borrower

• • Similar to a Master loan agreement in that its details terms and conditions loans, such as representations, covenants, borrowing limits, types of collateral, payment terms, documentation and reporting requirements in exchange for the capital provided by the Credit Facility Participants (in this case the Maker Vault) 
  • The full loan amount could be drawn at one time or in separate draws.

• Loan Supplement between the Trust as lender and the Lend Co. as borrower

• • Used for multiple loan draws
  • Supplements the Revolving Credit Facility Agreement for a specific loan advances and contains specific loan details 

• Promissory Note

• This is the document that evidences a loan was made.

• Security Agreement 

• Unconditional and irrevocable assignment of all assets of Lend Co. in favor of the Trust as collateral for the loan according to the Trust Agreement

• Misc. Closing Documents

• • Closing legal opinions
  • Closing certificates

• Post-closing covenants of Lend Co., as borrower

• • Reporting
  • Ratios

 

Trust <> Maker Representative Entity (elected and authorized by governance)

• Trust formed by filing in Delaware

• Trust Agreement

• • Governs the operations of the Trust
  • Holds the rights of the MKR holders in the event of a Vault liquidation
  • Exercises such rights as directed by the Maker Representative Entity in accordance with the Trust Agreement

 

Trustee <> Maker Representative Entity (elected by governance)

• Appoints Trustee as trustee of the Trust in the Trust Agreement  
  • The Trustee acts for the benefit of the Trust beneficiaries

 

Process (for Ground Lease / Build-to-Suit):

1. Lend Co. pursues Maker Governance to have an executive vote which approves the collateral type and designates the Maker Representative Entity
   1. All documents are shown and approved substantially in the form submitted 
   2. Reporting requirements are agreed to (this is a term included in the credit facility agreement)
   3. Tentative Debt Ceiling set (temporarily 0)
   4. Initial Risk Premium set 
   5. Portfolio of Approved Tenants
   6. Equity requirement of Borrow Co.
   7. The term of the credit facility (3 years)
2. Set up structure and execute documents, and create an arbitrary ERC20 token [RWA1] for Lend Co.  
   1. RWA1 has a whitelist with one address (the Trust) or there are no liquidations and Dai is sent to the buffer in the event of a “triggering event”
   2. Assumes that agreed equity has been raised in Lend Co. and there is a Letter of Intent with Borrow Co.
   3. Lend Co. will use equity capital to fund the project initially and intends to source the remainder from the Maker Vault
3. Lend Co. requests that its Debt Ceiling is raised to the agreed upon amount and once it is, the Dai is minted and withdrawn to Lend Co.
   1. Dai is converted to fiat currency
4. Borrow Co. executes its operations
   1. Lend Co. funds these operations as needed with the fiat currency
   2. (6-12 months passes…)
5. Borrow Co. decides to sell the asset and requests a payoff letter
   1. Interest is calculated between Borrow Co. and Lend Co.
   2. Lend Co. releases the lien once the money is delivered to the Title company
6. Lend Co. acquires Dai with the capital paid by Borrow Co. and repays its Vault balance or revolves the loan to a new borrower 
   1. Quality Report for revolving new assets into Lend Co.:
      1. Tenant selection must be pre-approved
      2. New Tenants must be approved by Maker Governance (likely a domain team) for any increase beyond 15% of the asset portfolio. LendCo has discretion over tenant selection for no more than 15% of the portfolio (on a capital basis).

 

------

 

As LendCo plans to expand into different sectors over time, an updated practical guide per sector will be provided. 

 

In addition to the bi-weekly collateral call and governance call, I am planning to set up a zoom Ask-Me-Anything to go over any aspect of this structure and its implications. We can do them at whatever frequency and length deeded appropriate. 

 

------

 

MKR Community.... This will require significant capital outlay (on my end) to get this started and maintained. I would like to gauge if this is something the Community wants. Real-World Assets (general) first; then the above structure second. Signal request coming! Stay tuned. 

 

Until then, ask questions. (Ping me privately if you want.) Making things public helps everyone !!