A debenture is a type of bond. More precisely, it is an unsecured loan certificate given by a company and supported by credit rather than collateral or physical assets. Debentures rely solely on the creditworthiness of the issuer. Like other bonds, debentures are noted in an indenture. Debentures are one of the most common forms of long term loans and are usually accompanied by a fixed interest rate. Some debentures are even convertible. This means that after a certain period of time, they can be converted into equity shares of the company that issued the debenture.

Debentures are one of the most common forms of long term loans and are usually accompanied by a fixed interest rate. Some debentures are even convertible. This means that after a certain period of time, they can be converted into equity shares of the company that issued the debenture.

For the lender, debentures are generally a good thing, as it removes any risk of repayment and replaces it with returns guaranteed by U.S. Treasury bonds (or, in some cases, bonds issued by Fannie Mae, Freddie Mac, or Ginnie Mae).

From the borrower's perspective, there are also some advantages to using debentures. If interest rates are expected to rise, debentures can be particularly advantageous for a note with a variable rate. By replacing the loan’s collateral with bonds, a borrower doesn’t need to be concerned with rising rates.

Defeasance can also have accounting benefits. By replacing the collateral with securities, the debt is effectively removed from a company’s balance sheet. This makes a commercial real estate investor’s books far less complex when it comes to logging debt service transactions.

The main risks associated with using a debenture in commercial real estate are the reliance on the creditworthiness of the issuer and the potential for high costs. Debentures rely solely on the creditworthiness of the issuer, meaning that if the issuer defaults on the loan, the debenture holder may not be able to recover the full amount of the loan. Additionally, the process of defeasance, which is often used in conjunction with debentures, can be extremely expensive due to the complexity of the process and the intensive capital investment into the replacement collateral.

Debentures are one of the most common forms of long term loans and are usually accompanied by a fixed interest rate. Some debentures are even convertible. This means that after a certain period of time, they can be converted into equity shares of the company that issued the debenture.

The different types of debentures available for commercial real estate include:

• Fixed Rate Debentures - These debentures have a fixed interest rate that is agreed upon at the time of the loan.
• Floating Rate Debentures - These debentures have an interest rate that is adjusted periodically based on market conditions.
• Convertible Debentures - These debentures can be converted into equity shares of the company that issued the debenture after a certain period of time.

The tax implications of using a debenture in commercial real estate are similar to those of other forms of long-term loans. The interest paid on the debenture is tax deductible, meaning that the borrower can deduct the interest from their federal income taxes. For example, if a commercial real estate borrower pays $10,000/month in mortgage payments, $2,000 of which is interest, they would be able to take a mortgage interest tax deduction of approximately $24,000 for that year. This can be especially impactful if a borrower is utilizing higher interest financing, such as a construction loan.

It is important to note that the interest rate on a debenture is usually fixed, meaning that the borrower will pay the same amount of interest each month. This can be beneficial for borrowers who want to have a predictable monthly payment.