assignment of interest rate cap agreement

That's 'Interest'ing May 2022 - A Primer on Interest Rate Caps

When the interest rate on a mortgage financing is not fixed, the amount that a borrower may be required to pay may fluctuate depending on changes in the underlying index to which the “margin” or “spread” is tied. While a lender may be comfortable with its underwriting of a financing and the ability of its borrower to service its debt at closing, if the underlying index of a floating rate loan changes over time, the lender’s comfort and the ability of its borrower to service its debt will obviously change. To combat against interest rate volatility, borrowers and lenders usually agree to hedge the interest rate against the uncertainty in the market for floating rate loans. The most common form of such hedging is an “interest rate cap.”

An interest rate cap is a derivative whereby the interest rate cap provider (the “counterparty”) agrees to pay the interest which would be payable by the borrower over a strike price (the “strike”) on the notional amount (the principal amount) of the loan. Consequently, if the index of the loan rises above the strike, the counterparty, and not the borrower, is liable for the excess interest payment obligation. In this way, the borrower’s liability for payment of interest on the loan in question is always “capped” at an amount equal to the strike plus the spread.

As additional collateral for a loan, the borrower will purchase an interest rate cap and pledge it to the lender. Simply put, the interest rate cap is an insurance policy on a floating rate loan, which protects the borrower and the lender if the interest rate index rises above the strike during a specified period of time (the “term”). The term of the cap is usually coterminous with the initial term of the loan. If the loan is extended, extensions are usually conditioned on the purchase of a new interest rate cap for the extended period.

Caps are purchased upfront with a single payment at the closing of a loan. After the premium is paid, the borrower has no further payment obligations. Most lenders will require borrowers to purchase the interest rate cap as a condition to closing the loan. Lenders also require that the cap provider have a minimum credit rating from Moody’s, S&P, Fitch or another rating agency. The interest rate cap is usually auctioned to a number of creditworthy financial institutions to secure the most favorable terms at the lowest premium price. Lenders will require the counterparty to maintain a certain rating level during the term. In the event that the counterparty does not maintain its rating, the borrower will typically be required to (i) replace the counterparty with a new counterparty that meets the qualifications and execute a new interest rate protection agreement, (ii) require the counterparty to supply a guaranty from a party meeting the ratings default, or (iii) cause the counterparty to deliver collateral to secure its exposure to the borrower in an amount acceptable to the lender and the rating agencies. In most cases, borrowers will choose either option (i) or (ii).

Since most caps are purchased through an auction process, a bid package is usually assembled for the bidders, which includes the agreed-upon terms of the interest rate cap, the timeline for which the auction must be completed, the assignment of interest rate cap protection agreement, and the form of confirmation. The confirmation describes the particulars of the transaction, such as the loan amount, payment dates, accrual periods and other pertinent dates, the rates, and other material items necessary to understand the parameters of the interest rate cap. It is important to review the confirmation and the bid package to ensure all terms are correct, and accurately reflect the terms of the transaction. At closing, the borrower will collaterally assign the interest rate cap agreement, which is additional collateral for the loan, and ensures the lender’s right to receive payments under the agreement.

While interest rate hedging takes many forms, interest rate caps are the most common derivative in mortgage financing. As we understand the process, we expect the market and traditional requirements to make implementation of this aspect of mortgage financing a smoother and simpler endeavor.

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When the interest rate on a mortgage financing is not fixed, the amount that a borrower may be required to pay may fluctuate depending on changes in the underlying index to which the “margin” or “spread” is tied. While a lender may be comfortable with its underwriting of a financing and the ability of its borrower to service its debt at closing, if the underlying index of a floating rate loan changes over time, the lender’s comfort and the ability of its borrower to service its debt will obviously change. To combat against interest rate volatility, borrowers and lenders usually agree to hedge the interest rate against the uncertainty in the market for floating rate loans. The most common form of such hedging is an “interest rate cap.”

An interest rate cap is a derivative whereby the interest rate cap provider (the “counterparty”) agrees to pay the interest which would be payable by the borrower over a strike price (the “strike”) on the notional amount (the principal amount) of the loan. Consequently, if the index of the loan rises above the strike, the counterparty, and not the borrower, is liable for the excess interest payment obligation. In this way, the borrower’s liability for payment of interest on the loan in question is always “capped” at an amount equal to the strike plus the spread.

As additional collateral for a loan, the borrower will purchase an interest rate cap and pledge it to the lender. Simply put, the interest rate cap is an insurance policy on a floating rate loan, which protects the borrower and the lender if the interest rate index rises above the strike during a specified period of time (the “term”). The term of the cap is usually coterminous with the initial term of the loan. If the loan is extended, extensions are usually conditioned on the purchase of a new interest rate cap for the extended period.

Caps are purchased upfront with a single payment at the closing of a loan. After the premium is paid, the borrower has no further payment obligations. Most lenders will require borrowers to purchase the interest rate cap as a condition to closing the loan. Lenders also require that the cap provider have a minimum credit rating from Moody’s, S&P, Fitch or another rating agency. The interest rate cap is usually auctioned to a number of creditworthy financial institutions to secure the most favorable terms at the lowest premium price. Lenders will require the counterparty to maintain a certain rating level during the term. In the event that the counterparty does not maintain its rating, the borrower will typically be required to (i) replace the counterparty with a new counterparty that meets the qualifications and execute a new interest rate protection agreement, (ii) require the counterparty to supply a guaranty from a party meeting the ratings default, or (iii) cause the counterparty to deliver collateral to secure its exposure to the borrower in an amount acceptable to the lender and the rating agencies. In most cases, borrowers will choose either option (i) or (ii).

Since most caps are purchased through an auction process, a bid package is usually assembled for the bidders, which includes the agreed-upon terms of the interest rate cap, the timeline for which the auction must be completed, the assignment of interest rate cap protection agreement, and the form of confirmation. The confirmation describes the particulars of the transaction, such as the loan amount, payment dates, accrual periods and other pertinent dates, the rates, and other material items necessary to understand the parameters of the interest rate cap. It is important to review the confirmation and the bid package to ensure all terms are correct, and accurately reflect the terms of the transaction. At closing, the borrower will collaterally assign the interest rate cap agreement, which is additional collateral for the loan, and ensures the lender’s right to receive payments under the agreement.

While interest rate hedging takes many forms, interest rate caps are the most common derivative in mortgage financing. As we understand the process, we expect the market and traditional requirements to make implementation of this aspect of mortgage financing a smoother and simpler endeavor.

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Interest Rate Cap Structure: Definition, Uses, and Examples

What Is an Interest Rate Cap Structure?

An interest rate cap structure refers to the provisions governing interest rate increases on variable-rate credit products. An interest rate cap is a limit on how high an interest rate can rise on variable-rate debt. Interest rate caps can be instituted across all types of variable rate products.

However, interest rate caps are commonly used in variable-rate mortgages and specifically adjustable-rate mortgage (ARM) loans.

Key Takeaways

• An interest rate cap is a limit on how high an interest rate can rise on variable rate debt. Interest rate caps are commonly used in variable-rate mortgages and specifically adjustable-rate mortgage (ARM) loans.
• Interest rate caps can have an overall limit on the interest for the loan and also be structured to limit incremental increases in the rate of a loan.

Interest rate caps can give borrowers protection against dramatic rate increases and also provide a ceiling for maximum interest rate costs.

How Interest Rate Caps Work

Interest rate cap structures serve to benefit the borrower in a rising interest rate environment. The caps can also make variable rate interest products more attractive and financially viable for customers.

Variable Rate Interest

Lenders can offer a wide range of variable rate interest products. These products are most profitable for lenders when rates are rising and most attractive for borrowers when rates are falling.

Variable-rate interest products are designed to fluctuate with the changing market environment. Investors in a variable rate interest product will pay an interest rate that is based on an underlying indexed rate plus a margin added to the index rate.

The combination of these two components results in the borrower’s fully indexed rate. Lenders can index the underlying indexed rate to various benchmarks with the most common being their prime rate or a U.S. Treasury rate.

Lenders also set a margin in the underwriting process based on the borrower’s credit profile. A borrower’s fully indexed interest rate will change as the underlying indexed rate fluctuates.

How Interest Rate Caps Can Be Structured

Interest rate caps can take various forms. Lenders have some flexibility in customizing how an interest rate cap might be structured. There can be an overall limit on the interest for the loan. The limit is an interest rate that your loan can never exceed, meaning that no matter how much interest rates rise over the life of the loan, the loan rate will never exceed the predetermined rate limit.

Interest rate caps can also be structured to limit incremental increases in the rate of a loan. An adjustable-rate mortgage (ARM) has a period in which the rate can readjust and increase if mortgage rates rise.

The ARM rate might be set to an index rate plus a few percentage points added by the lender. The interest rate cap structure limits how much a borrower's rate can readjust or move higher during the adjustment period. In other words, the product limits the number of interest rate percentage points the ARM can move higher.

Example of an Interest Rate Cap Structure

Adjustable-rate mortgages have many variations of interest rate cap structures. For example, let's say a borrower is considering a 5-1 ARM, which requires a fixed interest rate for five years followed by a variable interest rate afterward, which resets every 12 months.

With this mortgage product, the borrower is offered a 2-2-5 interest rate cap structure. The interest rate cap structure is broken down as follows:

• The first number refers to the initial incremental increase cap after the fixed-rate period expires. In other words, 2% is the maximum the rate can increase after the fixed-rate period ends in five years. If the fixed-rate was set at 3.5%, the cap on the rate would be 5.5% after the end of the five-year period.
• The second number is a periodic 12-month incremental increase cap meaning that after the five year period has expired, the rate will adjust to current market rates once per year. In this example, the ARM would have a 2% limit for that adjustment. It's quite common that the periodic cap can be identical to the initial cap.
• The third number is the lifetime cap, setting the maximum interest rate ceiling . In this example, the five represents the maximum interest rate increases on the mortgage.

So let's say the fixed rate was 3.5% and the rate was adjusted higher by 2% during the initial incremental increase to a rate of 5.5%. After 12 months, mortgage rates rose to 8%, the loan rate would be adjusted to 7.5% because of the 2% cap for the annual adjustment.

If rates increased by another 2%, the loan would only increase by 1% to 8.5%, because the lifetime cap is five percentage points above the original fixed rate.

Periodic Interest Rate Cap

A periodic interest rate cap refers to the maximum interest rate adjustment allowed during a particular period of an adjustable-rate loan or mortgage.

The periodic rate cap protects the borrower by limiting how much an adjustable-rate mortgage (ARM) product may change or adjust during any single interval. The periodic interest rate cap is just one component of the overall interest rate cap structure.

Limitations of an Interest Rate Cap

The limitations of an interest rate cap structure can depend on the product that a borrower chooses when entering into a mortgage or loan. If interest rates are rising, the rate will adjust higher, and the borrower might have been better off originally entering into a fixed-rate loan.

Although the cap limits the percentage increase, the rates on the loan still increase in a rising rate environment. In other words, borrowers must be able to afford the worst-case scenario rate on the loan if rates rise significantly.

What Are the Disadvantages of an Adjustable-Rate Mortgage?

The disadvantages of an adjustable-rate mortgage include the fact if interest rates rise that your monthly payments could increase to a point where you may not be able to afford them. If you cannot make your mortgage payments, your home is at risk of foreclosure.

Can You Pay Off an ARM Early?

Whether you can pay off an adjustable rate mortgage (ARM) early will depend on the terms of your mortgages. Some lenders allow early payoffs with no penalties, while other will charge a fee if you pay off the loan before the terms ends.

Can You Refi Out of an ARM?

You can refinance an adjustable rate mortgage just as you would a traditional mortgage. You will essentially take out a new loan to pay off the original loan so you will have new terms.

The Bottom Line

Understanding how interest rates caps work with different types of mortgages can help determine with mortgage can best fit your needs. For more specific guidance on your options, consider consulting a professional financial advisor.

Consumer Financial Protection Bureau. " What Are Rates Caps? "

The Federal Reserve Board. " Consumer Handbook on Adjustable Rate Mortgages ."

Freddie Mac. " Considering an Adjustable Rate Mortgage? "

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What is an Interest Rate Cap?

A type of interest rate derivative, an interest rate cap, is an insurance policy on a floating interest rate, usually one-month LIBOR. Note that it has three main economic terms: term, notional, and strike rate. Did you know that an interest rate cap helps ensure that you don’t pay any more than a certain pre-determined level of interest on the loan? This insulates you against extreme or volatile rate jumps over the term of your loan.

Examples of Interest Rate Cap

• Example 1: Initial interest rate cap

Here’s Investopedia’s definition of an Interest Rate Cap .

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United States: A Primer On Interest Rate Caps

When the interest rate on a mortgage financing is not fixed, the amount that a borrower may be required to pay may fluctuate depending on changes in the underlying index to which the "margin" or "spread" is tied. While a lender may be comfortable with its underwriting of a financing and the ability of its borrower to service its debt at closing, if the underlying index of a floating rate loan changes over time, the lender's comfort and the ability of its borrower to service its debt will obviously change. To combat against interest rate volatility, borrowers and lenders usually agree to hedge the interest rate against the uncertainty in the market for floating rate loans. The most common form of such hedging is an "interest rate cap."

An interest rate cap is a derivative whereby the interest rate cap provider (the "counterparty") agrees to pay the interest which would be payable by the borrower over a strike price (the "strike") on the notional amount (the principal amount) of the loan. Consequently, if the index of the loan rises above the strike, the counterparty, and not the borrower, is liable for the excess interest payment obligation. In this way, the borrower's liability for payment of interest on the loan in question is always "capped" at an amount equal to the strike plus the spread.

As additional collateral for a loan, the borrower will purchase an interest rate cap and pledge it to the lender. Simply put, the interest rate cap is an insurance policy on a floating rate loan, which protects the borrower and the lender if the interest rate index rises above the strike during a specified period of time (the "term"). The term of the cap is usually coterminous with the initial term of the loan. If the loan is extended, extensions are usually conditioned on the purchase of a new interest rate cap for the extended period.

Caps are purchased upfront with a single payment at the closing of a loan. After the premium is paid, the borrower has no further payment obligations. Most lenders will require borrowers to purchase the interest rate cap as a condition to closing the loan. Lenders also require that the cap provider have a minimum credit rating from Moody's, S&P, Fitch or another rating agency. The interest rate cap is usually auctioned to a number of creditworthy financial institutions to secure the most favorable terms at the lowest premium price. Lenders will require the counterparty to maintain a certain rating level during the term. In the event that the counterparty does not maintain its rating, the borrower will typically be required to (i) replace the counterparty with a new counterparty that meets the qualifications and execute a new interest rate protection agreement, (ii) require the counterparty to supply a guaranty from a party meeting the ratings default, or (iii) cause the counterparty to deliver collateral to secure its exposure to the borrower in an amount acceptable to the lender and the rating agencies. In most cases, borrowers will choose either option (i) or (ii).

Since most caps are purchased through an auction process, a bid package is usually assembled for the bidders, which includes the agreed-upon terms of the interest rate cap, the timeline for which the auction must be completed, the assignment of interest rate cap protection agreement, and the form of confirmation. The confirmation describes the particulars of the transaction, such as the loan amount, payment dates, accrual periods and other pertinent dates, the rates, and other material items necessary to understand the parameters of the interest rate cap. It is important to review the confirmation and the bid package to ensure all terms are correct, and accurately reflect the terms of the transaction. At closing, the borrower will collaterally assign the interest rate cap agreement, which is additional collateral for the loan, and ensures the lender's right to receive payments under the agreement.

While interest rate hedging takes many forms, interest rate caps are the most common derivative in mortgage financing. As we understand the process, we expect the market and traditional requirements to make implementation of this aspect of mortgage financing a smoother and simpler endeavor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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What Is An Interest Rate Cap?

An interest rate cap, a.k.a “cap”, is essentially an insurance policy, purchased by a borrower, that protects them against undesirable movements in a floating interest rate, most commonly 1-month LIBOR or SOFR. Caps have three primary economic terms:

• Notional: the dollar amount covered by the cap, typically equating to the loan amount
• Term: the duration of the cap, typically two or three years, commonly shorter than the loan term.
• Strike Rate: the interest rate level, above which the cap will provide a financial benefit to the borrower.

The concept is best explained via an example: Let’s assume that the 1-month LIBOR Strike Rate in the cap is 2.00% and 1-month LIBOR rises to 2.25%. The cap provider – typically a bank – would pay the borrower 0.25%. While the borrower still pays the LIBOR-driven market interest rate of 2.25%, the cap allows them to “buy down” their effective interest rate to the 2.00% Strike Rate.

Why Do Borrowers Buy A Cap?

The cap creates a ceiling on the borrower’s floating interest rate. Should the floating interest rate rise above the Strike Rate during any month over the life of the cap, the cap’s insurance feature serves to limit the cap owner’s exposure to a move higher in the floating rate; if the floating rate moves higher than the Strike Rate, the Cap serves to limit the financial damage.

To buy a cap, the borrower makes a single, upfront payment to the cap provider, typically a bank.

Interest rate caps are one of the most efficient ways to hedge against an increase in a floating interest rate and are most commonly used to hedge short term, “bridge” financings. Caps offer many advantages over other types of interest rate hedges, like swaps, such as:

• A defined cost, paid when the cap is purchased
• No prepayment penalty or termination cost
• Cap owner retains exposure to the floating rate, should it move lower
• Greatly reduced transaction cost
• Totally customizable, to achieve the perfect balance of protection and cost
• Can be bid out between multiple bank providers to achieve to lowest available cost
• Can be transferred to other floating rate debt

What Determines The Cost Of A Cap?

To explain how the cost of a cap is determined, Let’s drill down on a few key variables mentioned earlier. The cost is driven by the mix of:

• Notional: Often referred to as the “size” of the rate cap, the Notional typically equals the loan amount that it’s being used to hedge. In general, the larger the Notional, the higher the cap’s cost.
• Term: The amount of time the cap is providing protection to the borrower. The longer the Term, the more expensive the cap. Each additional month of protection is typically more expensive than the previous month; said another way, a cap with a 3-year Term is much more expensive than a cap with a 2-year Term.
• Strike Rate: The level of the floating rate above which triggers payments from the cap provider (a bank) to the cap owner (a borrower). The lower the Strike, the more expensive the cap.

For a defined mix of Notional, Term and Strike Rate, the cost of the rate cap will fluctuate over time based upon movements in the “underlying” floating interest rate, e.g. 1-month LIBOR or SOFR. The lower the underlying rate is relative to the Strike Rate the cheaper the cost of the cap and vice-versa.

In fact, how the financial markets expect the underlying interest rate to change in the future also has a big impact on the cap’s cost. If markets expect the underlying rate to increase over the Term of the cap, the greater the likelihood of a payout to the borrower increases, hence the more expensive the cap.

The hidden drivers of cap cost: Interest rate volatility. The more the underlying rate, e.g. 1-month LIBOR, moves around, the greater the likelihood that the underlying rate will spike higher than the Strike Rate. The greater the volatility in interest rates, the more expensive a cap becomes.

Finally, yet another factor that has a big impact on the cost of a cap: The Lender’s rating requirements. Most bridge lenders that require caps of their borrowers also require that the borrower buy the rate cap from a credit worthy financial institution. They manifest this requirement via verbiage in the loan agreement which defines “Initial Ratings” and “Downgrade Triggers”:

• An “Initial Rating” is a requirement by the Lender that the borrower purchase the cap from a bank that has a minimum credit rating – from the likes of S&P, Moody’s or Fitch – at the time the cap is purchased.
• A “Downgrade Trigger” is a requirement by the Lender that the Bank the borrower purchased the cap from maintain a defined minimum credit rating – again, from the likes of S&P, Moody’s or Fitch – over the Term of the rate cap. Should the Bank’s credit rating fall below the Downgrade Trigger, the Borrower must remedy the breach via the purchase of another cap from a Bank that meets the credit requirements.

In general, the higher the credit rating requirement, e.g. A+ S&P versus A- S&P, the more expensive the cap.

Can Any bank Sell A Cap?

No. While most of the large banks have the capability to sell the borrower a cap, most have limited interest, and thus are not competitive on price. There are only a handful of banks that specialize in caps and make a real business of it, having efficiencies in process and competitiveness in pricing. Further, even fewer of this handful of banks will participate in a bidding auction.

How much Lead Time Is Needed Before Starting The Cap Purchasing Process?

There are several steps involved in getting the ball rolling on the rate cap. While Derivative Logic can routinely orchestrate and help pull the trigger on the cap purchase in as little as 24 hours, we recommend engaging with us at least one week prior to the planned cap purchase or loan close. Pro tip: Don’t put yourself in a position where delays in the cap process also delay the loan close. Get us involved as early as possible.

What Documentation Is Needed To Buy A Cap?

Planning to purchase a cap requires documentation at several points in the process, specifically:

• Bid Package
• Dodd-Frank related, “Know Your Customer” disclosures
• Incumbency Certificate
• Collateral Assignment
• Derivative Logic’s Transaction Summary
• Legal Opinion
• Confirmation

Lender’s that mandate borrowers buy caps are very familiar with what documentation is needed. Derivative Logic facilitates the generation, circulation and execution of all required documentation as you travel down the road toward your cap purchase and loan close.

Why do I need help with my interest rate cap?

Interest rate caps pricing is not transparent – you don’t realize how much the bank is making off you. Structuring alternatives are never fully presented – the cap depends on variables you need to understand to get a fair price.

How do I calculate my cap cost?

The short answer – WITH HELP! The rates quoted on Bloomberg or in the Wall Street Journal may not be best for your specific situation. They are general indications. Knowing the appropriate details insures you are offered a fair rate.

Why would I enter into an interest rate cap?

You want to limit the impact of a rise in floating interest rates. In fact, your loan agreement may likely require you to enter into a cap for this reason. You’re more likely to be able to pay off your loan if you’re not overly squeezed by a higher market rate. But there are considerations! Let’s talk about your unique situation before you pull the trigger so you are assured you’re getting a fair market price.

What does CAP stand for?

Nothing! It’s not an abbreviation, it’s literally a cap on the interest rate you effectively pay on your loan. However, caps are financially important enough for your company to think about with CAPITALIZED emphasis, so give us a call to discuss your deal!

What are the risks of interest rate caps?

A cap can be thought of as similar to buying insurance against a future risk, in this case, the risk that the interest rate your loan is based on increases so much that your project is financially damaged. You want to buy the right policy at a fair price. The full value of expert advice on your side often develops after a cap transaction has closed.

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Accounting for Interest Rate Caps

In March 2022, in an effort to fight inflation, the Federal Reserve raised its federal funds benchmark rate for the first time since 2018. Rate hikes have continued throughout the year rising from around 0% in the beginning of 2022 to almost 4% in November, a level which the U.S. has not seen in nearly 15 years. This means it is now more expensive to borrow money than it was a year ago, as borrowers will have to pay higher interest rates. Also, any borrower with preexisting debt that carries a variable interest rate based on underlying indexes will be affected by these rate hikes. However, interest rate caps are one way for companies to protect themselves from rising interest rates when holding variable rate debt.

An interest rate cap is an agreement that allows the borrower to negotiate a pre-determined cap on a variable interest rate. In other words, an interest rate cap is an insurance policy a borrower can take out against interest rate increases. These caps are purchased by the borrower, usually in conjunction with obtaining variable rate debt, and require a single upfront premium payment. The cost of this premium is dependent on a number of factors, but three key variables influencing the price are the notional, the term, and the strike rate. The notional is the amount of debt being hedged by the cap, typically a larger notional will cost more to cap the interest than a smaller one. The term is the length of time the cap will be effective, shorter terms will cost less than longer terms. The strike rate is the maximum interest rate the borrower will be responsible for paying and the rate at which the provider of the cap will start making payments to the borrower. While other external factors, like current market rate volatility, will also influence cap premiums, these factors play a crucial role in how much an interest rate cap will cost. But how do companies account for these interest rate cap contracts?

Accounting for interest rate caps  

When entering into an interest rate cap, the first step when determining the appropriate accounting treatment is to determine if the cap meets the criteria of a derivative. Under ASC 815, a derivative has all three of the following distinguishing characteristics:

• The settlement amount is determined by an underlying (the referenced rate) and a notional amount (the debt amount);
• The initial investment, the premium in the case of an interest rate cap, is either zero or smaller than the notional amount or the amount obtained by applying the notional amount to the underlying; and
• Net settlement is permitted or required, a market mechanism exists for net settlement (like market rates exceeding the strike rate), or the asset to be delivered is readily convertible to cash.

Based on the key terms associated with interest rate caps discussed previously, these will likely meet these three criteria of a derivative. Once that determination is made, the next step will be to determine if the interest rate cap qualifies for hedge accounting and if the company wants to elect hedge accounting. Derivatives are recorded at fair value on the balance sheet and without hedge accounting, changes in fair value of the cap would be recorded through earnings in each reporting period. However, the implementation of hedge accounting is optional and is an election a company can make.

Hedge accounting involves the designation of a derivative as a hedging instrument and designating the hedge item, either a recognized asset or liability that is not remeasured at fair value, an unrecognized firm commitment, or a forecasted transaction (variable interest on debt). ASC 815-20-25 discusses the often-complex criteria that must be met for transactions to qualify for hedge accounting, which include the following:               

• Formal designation and documentation at hedge inception.
• Eligibility of hedged items and transactions.
• Eligibility of hedging instruments.
• Hedge effectiveness.

While a company will have to perform a complex analysis to determine if its derivatives meet each of the criteria to qualify for hedge accounting, in many cases, interest rate caps will qualify for hedge accounting as they hedge the increase of interest payments, a forecasted transaction, protecting the borrower from exposure to increased interest rates.

As mentioned above, ASC 815 requires all derivatives to be recognized at fair value on the balance sheet. However, the accounting for changes in the fair value of a derivative that qualifies for hedge accounting will depend on the type of hedge it is. Some of the common types of hedges include cash flow hedges, fair value hedges, foreign currency hedges, and net investment hedges. An interest rate cap would fall under the definition of a cash flow hedge, which is a hedge of the exposure to variability in the cash flows of a forecasted transaction. As such, the recognition of changes in the fair value of an interest rate cap are recorded in other comprehensive income (OCI) until the hedged transaction impacts earnings, which in this case is when the strike rate is exceeded and the provider of the cap starts making payments to the borrower, at which time a portion of the amounts reported in OCI will be reclassified to earnings.

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Exhibit 10.39

COLLATERAL ASSIGNMENT OF INTEREST RATE CAP AGREEMENT

COLLATERAL ASSIGNMENT OF INTEREST RATE CAP AGREEMENT , dated as of November 29, 2006 (this “ Assignment ”), made by PH FEE OWNER LLC , a Delaware limited liability company, and OPBIZ, L.L.C. , a Nevada limited liability company, each having its principal place of business at c/o OpBiz, L.L.C., 3667 Las Vegas Boulevard South, Las Vegas, Nevada 89109 (collectively, “ Assignor ”), in favor of COLUMN FINANCIAL, INC. , a Delaware corporation having an address at 11 Madison Avenue, New York, New York 10010 (“ Assignee ”).  Capitalized terms used but not defined herein shall have the meanings assigned such terms in that certain Loan Agreement, dated as of the date hereof, between Assignor, as borrower, and Assignee, as lender (as amended, restated, replaced, supplemented or otherwise modified from time to time, the “ Loan Agreement ”).

1.                     For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by Assignor, Assignor hereby assigns, grants, delivers and transfers to Assignee, as collateral, all of its interest, whether now owned or hereafter acquired, now existing or hereafter arising, wherever located, in, to and under that certain Confirmation  (Reference Number DPA609207), dated November 29, 2006, between Assignor and SMBC Derivative Products Limited, as the counterparty thereunder (the “ Counterparty ”) (together with that certain ISDA Master Agreement (Multicurrency-Cross Border) form deemed to have been executed by Assignor and the Counterparty concurrently with the Confirmation  pursuant to the terms of such Confirmation , the “ Interest Rate Cap Agreement ”), including, but not limited to, any and all rights that such Assignor may now or hereafter have to any and all payments, disbursements, distributions or proceeds (collectively, the “ Payments ”) owing, payable or required to be delivered to Assignor on account of the Interest Rate Cap Agreement with respect to the period commencing on the date hereof and ending on the date on which Assignor shall have repaid the Loan in its entirety, and all proceeds of any or all of the foregoing (collectively, the “ Cap Collateral ”).  Assignor hereby grants to Assignee a security interest in and to the Interest Rate Cap Agreement, the Cap Collateral and all Proceeds (as defined in the Uniform Commercial Code adopted in the State of New York (the “ UCC ”)) thereof, to have and to hold the same, unto Assignee, its successors and assigns, and Assignor covenants and agrees to cause all Payments to be made directly to Assignee.  This Assignment constitutes additional security for the obligations of Assignor governed by the Loan Agreement and secured or evidenced by the other Loan Documents.

2.                     counterparty hereby consents to the assignment contained in paragraph 1 hereof and agrees that it will make any payments that become payable under or pursuant to the interest rate cap agreement directly into the cash management account until such time as this assignment is terminated or otherwise canceled, at which time the counterparty will be instructed to make payments to or on behalf of assignor., 3.                     prior to the occurrence of an event of default, payments received by assignee shall be deposited into the cash management account and applied to payments becoming due under the note, as and when such payments are due.  upon the occurrence of an event of default (a) payments received by assignee may be applied by assignee to any principal, interest and other amounts owing by borrower under the note and the other loan, documents in such order and priority as assignee shall determine in its sole and absolute discretion and (b) assignee shall be entitled to exercise all remedies provided in the ucc with respect to the security interest being granted herein., 4.                     assignor hereby covenants and agrees that assignor shall not, without first obtaining assignee’s or its successor’s or assign’s written consent, convey, assign, sell, mortgage, encumber, pledge, hypothecate, grant a security interest in, grant an option or options with respect to, or otherwise dispose of (directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, and whether or not for consideration) the interest rate cap agreement.  assignor and counterparty hereby covenant and agree that neither assignor nor counterparty shall, without first obtaining assignee’s or its successor’s or assign’s written consent, amend, modify, cancel or terminate the interest rate cap agreement.  assignee agrees to be bound by all of the terms, covenants and conditions of the interest rate cap agreement., 5.                     in the event that for any reason the interest rate cap agreement ever expires, or is terminated, rescinded or revoked and, as a result thereof, a termination fee or such similar payment is owing to assignor by counterparty, such sum is and shall be considered a payment and a part of the cap collateral and shall be held and disbursed by assignee in accordance with the terms hereof; provided , that so long as no event of default has occurred and is continuing, assignee will (a) make such termination fee or similar payment available to assignor to be applied to the reasonable and customary costs and expenses payable by assignor in connection with assignor’s replacement of the interest rate cap agreement and (b) disburse the balance of such termination fee or similar payment to assignor if assignor has replaced the interest rate cap agreement in accordance with the terms and provisions of this assignment and the other loan documents, and such replacement interest rate cap agreement is in fact in full force and effect., 6.                     assignor represents and warrants that:  (a) it has the full power, right and authority to assign its interest in the cap collateral, (b) assignor owns the cap collateral free and clear of all liens and claims of others and assignor has not transferred, assigned, granted a security interest in or otherwise encumbered its interest in and to the cap collateral other than in favor of assignee, (c) no security agreement, financing statement or other document is on file or of record in any public office with respect to the cap collateral, other than in favor of assignee, (d) the obligation of the counterparty under the interest rate cap agreement to make payments is not subject to any defense or counterclaim arising from any act or omission of assignor or any affiliate of assignor, (e) the location of its chief executive office is the address set forth in the caption to this assignment and (f) upon the filing of ucc financing statements naming assignor as debtor and assignee as secured party in the office of the delaware secretary of state and the office of the nevada secretary of state, assignee will have a first priority perfected lien on the cap collateral., 7.                     assignor covenants and agrees with assignee as follows (a) it will comply with all terms of the interest rate cap agreement, (b) it will not waive any provision of the interest rate cap agreement, fail to deliver a copy of any notice received from counterparty to assignee or, without the prior written consent of assignee, fail to exercise any right thereunder and (c) it will not change the location of its state of organization from the location specified in the caption to this assignment unless, in conjunction therewith, assignor executes and delivers, to assignee such additional ucc financing statements as assignee shall reasonably request to allow for assignee’s continued prior and perfected lien on the cap collateral., 8.                     assignor further covenants and agrees with assignee that it will at any time and from time to time, upon the written request of assignee, and at the sole expense of assignor, promptly and duly execute and deliver such further instruments and documents and take such further action as assignee may reasonably request for the purpose of obtaining or preserving the full benefits of this assignment and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the ucc.  assignor also hereby authorizes assignee to file any such financing or continuation statement without the signature of assignor to the extent permitted by applicable law.  a carbon, photographic or other reproduction of this assignment shall be sufficient as a financing statement for filing in any jurisdiction., 9.                     this assignment does not include the delegation to assignee of any of assignor’s duties, responsibilities or obligations under the interest rate cap agreement, assignor remaining liable to perform all duties, responsibilities and obligations to be performed by assignor thereunder, and assignee shall not have any obligation or liability under the interest rate cap agreement or by reason of or arising out of this assignment or the receipt by assignee of any payment and assignor specifically agrees to indemnify and forever hold assignee harmless from any claim or liability on account thereof, including, without limitation, attorneys’ fees incurred., 10.                   assignee shall only be accountable for payments actually received by it hereunder.  assignee’s sole duty with respect to the custody, safekeeping and physical preservation of the cap collateral in its possession, under section 9-207 of the ucc or otherwise, shall be to deal with it in the same manner as assignee deals with similar property for its own account.  neither assignee nor any of its directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon all or any part of the cap collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any cap collateral upon the request of assignor or any other person or to take any other action whatsoever with regard to the cap collateral or any part thereof.  the powers conferred on assignee hereunder are solely to protect assignee’s interests in the cap collateral and shall not impose any duty upon assignee to exercise any such powers.  assignee shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to assignor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct., 11.                   any notices required to be given under this assignment shall be given in the manner provided in the loan agreement., 12.                   this assignment may not be modified, amended or terminated except by a written agreement executed by all of the parties hereto., 13.                   any provision of this assignment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition, or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction., 14.                   assignee shall not by any act (except by a written instrument), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any event of default or in any breach of any of the terms and conditions hereof.  no failure to exercise, nor any delay in exercising, on the part of assignee any right, power or privilege hereunder shall operate as a waiver thereof.  no single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege.  a waiver by assignee of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which assignee otherwise have on any future occasion.  the rights and remedies herein provided are cumulative, may be exercised singularly or concurrently and are not exclusive of any rights or remedies provided by law., 15.                   the parties hereto hereby notify counterparty of this assignment and the security interests granted to assignee hereunder and instruct counterparty to make all payments to be made under or pursuant to the terms of the interest rate cap agreement, without set-off, defense or counterclaim, to assignee in accordance with written instructions (subject to the terms hereof) delivered by assignee, its successors or assigns, to counterparty at the address set forth under its signature hereto., 16.                   this assignment shall be governed by and construed in accordance with the laws of the state of new york, without reference to choice of law doctrine., 17.                   this assignment shall terminate upon the earlier to occur of (a) the termination or expiration of the interest rate cap agreement and (b) the payment in full of the loan., 18.                   this assignment shall be binding upon and shall inure to the benefit of assignor and assignee and their respective successors and assigns., 19.                   this assignment may be executed in any number of counterparts each of which shall be an original, but all of which shall constitute one instrument., 20.                   assignee shall have the right to assign this assignment and the obligations hereunder in connection with the assignment of the loan.  the parties hereto acknowledge that following the execution and delivery of this assignment, assignee may sell, transfer and assign this assignment, the loan and the other loan documents.  all references to “ assignee ” hereunder shall be deemed to include the assigns of assignee and the parties hereto acknowledge that actions taken by assignee hereunder may be taken by assignee’s agents and by the agents of the assigns of assignee., 21.                   the provisions of section 9.4 of the loan agreement are hereby incorporated by reference as if fully set forth herein., 22.                   in consideration of the foregoing agreement by the counterparty, assignor and assignee agree that (a) counterparty shall be entitled to conclusively rely (without any independent investigation) on any notice or instructions from assignee in respect of the interest rate cap agreement and (b) counterparty shall be held harmless and shall be fully indemnified by assignor, from and against any and all claims, other than those arising out of the gross negligence or willful misconduct of counterparty, and from and against any damages, penalties, judgments, liabilities, losses or expenses (including attorney’s fees and disbursements) reasonably incurred by counterparty as a result of the assertion of any claim, by any person or entity, arising out of, or otherwise related to, any actions taken or omitted to be taken by counterparty in reliance upon any such instructions or notice provided by assignee..

23.           If Assignor consists of more than one Person, the obligations and liabilities of each such Person shall be joint and several.

[NO FURTHER TEXT ON THIS PAGE]

IN WITNESS WHEREOF, Assignor and Assignee have duly executed this Assignment on the day and year first written above.

THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF NOTICE OF THE FOREGOING ASSIGNMENT AND CONSENTS THERETO AND AGREES THAT THE UNDERSIGNED SHALL HEREAFTER CAUSE ALL PAYMENTS REQUIRED TO BE MADE BY THE UNDERSIGNED PURSUANT TO THE TERMS OF THE INTEREST RATE CAP AGREEMENT TO BE MADE DIRECTLY TO ASSIGNEE, ITS SUCCESSORS OR ASSIGNS, IN ACCORDANCE WITH WRITTEN INSTRUCTIONS (BUT SUBJECT TO THE TERMS OF THE ASSIGNMENT) TO BE DELIVERED BY ASSIGNEE, ITS SUCCESSORS OR ASSIGNS, TO THE UNDERSIGNED AT THE ADDRESS SET FORTH BELOW.  THE UNDERSIGNED FURTHER AGREES THAT ALL SUCH PAYMENTS SHALL BE MADE TO ASSIGNEE WITHOUT SET-OFF, DEFENSE OR COUNTERCLAIM.  THE UNDERSIGNED AGREES THAT IT SHALL NOT AMEND OR MODIFY THE INTEREST RATE CAP AGREEMENT WITHOUT THE PRIOR WRITTEN CONSENT OF ASSIGNEE, ITS SUCCESSORS OR ASSIGNS.

COUNTERPARTY:

Address for notice:

SMBC Derivative Products Limited

Eighth Floor, Temple Court

11 Queen Victoria Street

London EC4N 4TA United Kingdom

Attention: Swaps Administration

Facsimile No.: (44 207) 786 1419

Telephone No.: (44 207) 786 1400

with a copy to:

SMBC Capital Markets, Inc.

277 Park Avenue, Fifth Floor

New York, NY  10172  USA

Attention: President

Facsimile No.: (212) 224-4948

                   (212) 224-5111 (for payment and reset notices)

Telephone No.: (212) 224-5021