Although corporations most often issue mortgage debentures, limited liability partnerships and limited liability companies also have the option of issuing a mortgage debenture. With a mortgage debenture, the company issuing the debenture uses its assets, which it clearly specifies in the agreement, as collateral for a loan. The issuing firm may use the mortgage debenture to obtain funds to acquire fixed assets or fund overall operations.
A debenture is a corporate bond or promissory note issued by many publicly traded corporations or well-capitalized private corporations. In the U.S., corporations typically issue unsecured debentures -- backed solely by a promise to repay, the company's credit and its reputation -- not by specific assets. Institutions and individuals who buy corporate debentures generally do so because they believe the corporate bond issuer has a low probability of defaulting on its repayment. When a company uses its fixed assets to secure the loan or note and pledges its property as collateral, the debenture becomes a mortgage debenture.
Companies may take out a mortgage with a financial institution to acquire a specific piece or grouping of real estate. With a mortgage debenture, however, companies allow placement of a lien against a wider swath of real estate and fixed assets -- including machinery, structures and certain equipment -- as collateral for the loan. Essentially, a mortgage debenture has broader coverage than a mortgage. With a mortgage, the lender only has the capability to seize the mortgaged asset. With a mortgage debenture, the debenture holders often can seize the business in the event of default and dispose of assets of the company as a going concern.
In addition to current fixed assets, a debenture may place a blanket lien on any fixed assets the borrower may acquire at a later date. With companies with high property holdings, such as real estate investment trusts, the mortgage debenture may also cover intangible assets, including property management agreements. For real estate investment trusts with properties under development, the mortgage debenture may cover the construction-related intangibles, including designs, plans, approvals and warranties.
Single Asset Company
Debenture buyers may also take a debenture from a company that only owns one applicable fixed asset, even if that asset is real estate. This may occur with an LLC or LLP that invests in only one real estate project. The debenture gives the debenture holders more leeway in controlling the pledged asset and the actions of the company that owns the asset. For example, the mortgage debenture holders can place the company into receivership in the event of default, which would allow the holders to compel the sale of the real estate and prevent the company’s management from draining its cash.
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