Chapter 10: Specific Standards for Bond Investment

6. The relation of the value of the property to the funded debt: The soundness of the typical bond investment depends upon the ability of the obligor corporation to take care of its debts, rather than upon the value of the property on which the bonds have a lien. There are, however, various special types of obligations, the safety of which is in great measure dependent upon the assets securing them, as distinguished from the going-concern value of the enterprise as a whole. The most important of this type is the real estate bond. The value of the pledged land and buildings are of paramount importance, but these values are not something distinct from the success of the enterprise but are rather identical therewith.
• In the field of dwellings, offices and stores, the property values and rental values go hand in hand. In this sense it is largely immaterial whether the lender views mortgaged property of this kind as something with salable value or as something with an earning power, the equivalent of a going concern.
• Specialized buildings such as hotel, garage, club, hospital, church, factory loses the quality of rapid disposability and its value becomes bound up with the success of the particular enterprise for whose use it was originally intended. Hence, mortgage bonds on such structures are not actually real estate bonds in the accepted sense, but rather loans extended to a business and consequently their safety must be judged by all the stringent tests of an industrial concern.
• Values based on inflated appraisals of land and property or excessive construction costs must be taken into consideration.