4. Debt structuring
Before diving in debt structuring, a comprehensive understanding of Tulpea's financial model and the roles of each participant, along with the assets they hold, is essential for grasping the ecosystem's mechanics. The structure involves two types of tokens:
Real Estate-Backed Tokens (REBT) representing ownership in a real estate asset, held by borrowers.
Asset-Backed Debt Tokens (ABDT) representing structured real estate-backed debt, held by lenders.
While ABDT holders participate in a structured financial product, the underlying asset remains real estate-backed. The investment structure can be seen as a combination of debt and real estate exposure:
ABDT Holders: They provide a loan to the DAO to finance real estate investment projects and hold a debt backed by real estate.
Tulpea DAO: The DAO uses rental income to repay the loan. The DAO acts as the guarantor of the loan, even though it does not directly own the REBT.
REBT holders: They purchase a property on credit through the DAO, where rental income repays the amortizing loan, without taking on a direct credit line in their name.
ABDT issued in Tulpea's ecosystem are structured as fixed-income debt instruments with clearly defined financial attributes:
Face Value (Principal Amount): Each ABDT represents a proportional claim on the total mortgage loan amount issued for a real estate investment. The principal amount is repaid progressively through structured amortization.
Maturity Date: The repayment schedule follows a predefined period (e.g., 10, 15, or 20 years), ensuring investors have a clear expectation of capital recovery.
Coupon Payments (Yield Distribution): Investors receive periodic interest payments based on the loan’s fixed interest rate.
Interest rate pricing
Tulpea issues Amortizing Debt backed by real estate, offering a fixed yield to ensure predictable returns for investors while maintaining financial sustainability for borrowers. The debt structuring process is designed to align capital efficiency with risk-adjusted returns, ensuring that projects remain cash-flow positive and debt obligations are fully covered.
The core principle of Tulpea’s lending model is that debt repayment must be sustainable through project rentability, meaning the Net Operating Income (NOI) must sufficiently cover debt service obligations. This is quantified through the Debt Service Coverage Ratio (DSCR), which dictates the maximum interest rate and leverage levels.
Debt Service Coverage Ratio as a Risk Constraint
The DSCR is the fundamental metric ensuring that real estate projects can sustain their debt obligations. It measures the ratio between available net income and required debt payments:
A DSCR > 1 ensures the project generates sufficient income to cover annual debt obligations.
Higher DSCR values indicate lower risk and stronger financial health, reducing the likelihood of cash flow disruptions.
Tulpea caps the interest rate to maintain a minimum 1.2 DSCR threshold, ensuring the long-term viability of the financing structure.
Another way to understand it is:
This approach guarantees that debt remains affordable relative to the project's revenue potential, protecting both borrowers and investors.
NOI Calculation
Thus, NOI is the key indicator for defining debt terms, as it accounts for all major operational expenses, ensuring risk-adjusted debt issuance. It is calculated as:
Expenses
Description
Property Management Fees
Costs associated with hiring professionals to manage the property.
Expected Vacancy Costs
Estimated opportunity costs for periods when the property is not rented.
Extra Vacancy Buffer
Additional funds reserved to cover unexpected extended vacancy periods.
Maintenance Costs
Expenses for repairs, regular maintenance, and improvements.
Taxes
Property taxes and other relevant local taxes.
Other Operating Expenses
Miscellaneous costs related to operating the property.
Insurance Costs
Coverage for property damage, liability, and other insurance needs.
Contributions to Reserve Funds
Allocations to project-specific funds for risk mitigation.
A higher NOI relative to interest payments indicates a financially healthy project with a lower risk of default. This is crucial for ensuring predictable returns for ABDT holders and for maintaining the overall stability of the system.
Amortization Structure
In practice, each monthly payment includes both interest and principal repayment. This amortization structure ensures that the debt decreases progressively over time, reducing overall risk for ABDT holders and aligning incentives with positive cash flow generation.
The monthly mortgage payment (M) can be calculated using:
Where:
M is the monthly payment.
P is the principal amount.
r is the monthly interest rate.
n is the total number of monthly payments.
Debt Tranche Structuring
To accommodate different investor risk appetites, Tulpea’s ABDT model segments debt into tranches:
Senior Tranche: Prioritized repayment with lower risk and lower yield. In the event of repayment, including monthly installments and capital recovery, the senior tranche investors are prioritized first to receive payments.
Mezzanine Tranche: Intermediate risk and yield, providing a balanced exposure.
Junior Tranche: Higher yield but absorbing first losses, appealing to investors seeking greater returns.
Repayments, including monthly installments and capital recovery in case of default, are prioritized based on tranche hierarchy to ensure the stability of returns. This means that senior tranche investors are repaid first, followed by mezzanine, and finally junior tranches. This structure minimizes risk for senior investors while offering higher returns for those willing to absorb greater risk.
Investors in ABDT benefit from a dual-yield structure designed to balance stability and growth:
Fixed Yield Component: Corresponding to the repayment of the debt (principal + interest), this portion is paid in stablecoins (e.g., USDT, USDE), ensuring predictable and secure returns.
Variable Yield Component: An additional yield paid in $TULIP, Tulpea’s governance token, which adjusts based on market conditions. This extra incentive rewards lenders and aligns their interests with the long-term growth of the ecosystem.
This structure ensures both stability and upside potential, aligning investor returns with the growth of the Tulpea ecosystem.
ABDT Issuance
To improve capital efficiency and enhance liquidity for lenders and investors, Tulpea structures mortgage debt into Asset-Backed Debt (ABD) through a securitization and tokenization process. This mechanism allows real estate-backed loans to be converted into financial instruments that can be traded, improving liquidity and broadening access to investment opportunities.
Tulpea enables two distinct models for ABD issuance, each catering to different financing structures:
Institutional ABD Issuance (Bank-Financed Model): When a bank provides mortgage financing, it may choose to securitize and sell ABS to institutional investors. This allows the bank to recycle capital, reduce balance sheet exposure, and improve regulatory capital efficiency while still profiting from loan origination and servicing fees. Non-tokenized ABD are highly illiquid and cannot be used elsewhere (e.g., in DeFi).
Direct ABD Issuance (Peer-to-Peer Model): When no traditional bank financing is involved, Tulpea directly structures and issues ABS, allowing peer-to-peer financing. This enables both institutional and retail investors to fund real estate-backed loans without relying on traditional financial intermediaries.
Tulpea transforms illiquid real estate-backed loans into tradeable ABDT instruments through a two-step process:
Securitization: Mortgage-backed loans are pooled, structured, and divided into tranches to create risk-adjusted securities.
Tokenization: The resulting ABD are converted into digital tokens, enabling trading on both traditional financial markets and DeFi platforms.
In both models, debt is first securitized, then tokenized, and is available on both primary and secondary markets, allowing access to a broader range of investors. Additionally, tokenized ABS can be integrated into other DeFi protocols, enhancing liquidity and interoperability.
ABDT introduces a novel financial product for the crypto ecosystem. Currently, access to structured real estate debt is highly restrictive for retail investors, requiring minimum capital thresholds and complex regulatory approvals. By tokenizing ABD, Tulpea enables fractional ownership, opening investment opportunities to a broader market while maintaining institutional-grade risk structuring.
Default Protection
In practice, a full default scenario is highly unlikely due to the vesting mechanism of REBT tokens and the comprehensive risk management measures in place. However, Tulpea’s model accounts for both minor cash flow fluctuations and major defaults:
Cash Flow Fluctuation: If rental income temporarily drops below the expected level, the reserve fund covers the shortfall. Interest rates on the ABD are structured based on the estimated NOI to ensure stable returns during minor fluctuations. Four main safeguards help mitigate this risk:
Project Reserve Fund: This fund is built through initial contributions from lenders during the debt issuance, as well as monthly contributions from excess cash flow generated by the property. The goal is to reach 10% of the principal amount to cover short-term fluctuations in cash flow.
DAO Reserve Fund: The DAO also maintains a general reserve fund that can be mobilized to cover cash flow fluctuations or major defaults if the project reserve fund is insufficient.
NOI analysis: Both the operating expenses and gross rental income are taken into account in the NOI calculation, which directly influences the debt interest rate.
Property Selection: The fit of the property with the investment thesis is crucial to avoid certain risks of cash flow fluctuations. This includes selecting properties with multi-year contracts with reliable tenants (e.g., state contracts) or securing tenant guarantees.
Default: A default is defined as the inability to meet repayment obligations over an extended period (e.g., multiple missed payments or insolvency of the project).
REBT vesting: In the event of a full default, vested REBT tokens can be mobilized by the DAO to compensate ABS holders, ensuring capital recovery and stabilizing the system. This mechanism ensures that the property remains activable to prevent any capital loss.
Reserve Funds: The project reserve fund is the first line of defense in the event of a default. However, the DAO’s general reserve fund can also be mobilized to cover rare cases of major defaults.
Insurance: Comprehensive insurance policies are in place to protect against major risks affecting the property’s integrity (e.g., fire, natural disasters).
Property Selection: Proper property selection aligned with the investment thesis mitigates potential systemic risks, ensuring stable cash flow.
By combining REBT vesting, amortization, reserve funds, NOI analysis, and insurance mechanisms, Tulpea ensures a high level of risk management and financial stability for investors in real estate-backed ABS.
Risk Management Summary
Risk Category
Associated Impact
Potential Causes
Safeguards in Place
Increased Operating Expenses
Decrease in NOI
Rising property management fees, unexpected maintenance costs, increases in insurance premiums, property tax hikes, Inflation hikes
Inclusion of insurance, project reserve fund, NOI calculation with expected vacancy and extra vacancy buffers, DAO & project reserve funds, automated risk monitoring, regular operational audits
Reduction in Gross Rental Income
Decrease in NOI
Higher-than-expected vacancy rates, lower rental income, tenant default, regulatory changes affecting rents
Vacancy rate included in NOI, extra vacancy rate, DAO & project reserve funds, project reserve fund, automated risk monitoring.
Decrease in Property Value
Reduction in Collateral Value
Market downturn, neighborhood decline, damage to property, unfavorable macroeconomic conditions
Comprehensive insurance coverage, property quality selection criteria, periodic property valuation assessments
Tulpea’s robust risk management framework leverages multiple safeguards, such as reserve funds and insurance, while focusing on careful NOI calculation to ensure ongoing financial stability for ABS holders.
Conclusion
Tulpea’s ABD model balances risk and return through structured tranches, reserve funds, and a focus on positive cash flow. This ensures that ABDT holders are protected against both minor cash flow fluctuations and major defaults, making the model a secure and scalable approach to decentralized real estate financing.
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