Commercial Mortgage Lender Explains Credit Tenant Lease (CTL) Financing

Credit Tenant Lease (CTL) Financing is a unique commercial mortgage lending platform designed to finance the purchase, refinance and development of single tenant, triple net (NNN) leased, buildings. The buildings can be retail, office, industrial or warehouse; CTL loans can be written against any real estate as long as it’s occupied by a “credit tenant”.

For the purpose of CTL lending, a credit tenant is defined as a corporate entity that has earned an investment grade credit rating from the major rating agencies. Generally, any company rated lower than BBB- (triple B minus) by Standard & Poors or Baa3 by Moody’s, is not be considered investment grade and would not qualify for CTL financing.

CTL loans are very different than traditional commercial mortgage loans. Lenders who originate CTL financing are primarily concerned with the structure of the lease and the strength of the tenant rather than the value of the real estate or the credit of the borrower. CTL lenders count the lease and the income it generates as the main collateral backing the loan. This is a distinct difference as-compared to standard commercial real estate lending and represents a unique perspective in real estate finance.

CTL lending is possible because of the popularity of NNN leases among strong corporate tenants. When a landlord executes a true or “absolute” NNN lease with a good tenant, he has almost no management or operational responsibilities. The tenant is responsible for everything from paying the utility bills to maintaining the building, even large real estate issues, such as repaving the parking lot or replacing the HVAC system are all the responsibility of the tenant, not the land owner. Consequently a lender with a lien against a NNN leased property likewise needn’t worry much about the building; even if they have to repossess it in a foreclosure, they won’t have to actually run it. For buildings with long term NNN leases and excellent tenants, it only makes sense that lenders focus mainly on the lease.

CTL loans are originated by commercial mortgage bankers or direct CTL lenders. Bankers will issue and sell a private placement mortgage bond in-order to fund the CTL loan. Direct lenders also collateralize the lease into a bond, but often hold the debt in their own portfolios rather than sell it on the secondary market.

Because of the straight-forward nature of CTL financing loans amounts are typically larger than other institutional loans. Many CTL lenders will make no restrictions on loan-to-value or loan-to-cost and will write the maximum possible loan. The only real condition on the size of the loan is that the rent collected must cover the mortgage payment. Most CTL lenders require a minuscule debt-service-coverage (DSCR) ratio of only 1.01%-1.05%.

Speed of execution is another benefit of CTL loans. It only takes 45-60 days, from start to finish, to complete a CTL transaction. Bank loans, on-the-other-hand, are notorious for being long, drawn out bureaucratic affairs.

Borrowers who take advantage of CTL financing tend to be sophisticated commercial real estate investors who understand the business of NNN investing. They are generally seeking dependable, long term income from their real estate holdings and want permanent, fixed financing. The terms of CTL loans are “co-terminus” with the term of the underlying lease and the rates are usually fixed for the life of the loan. CTL loans are nearly always self amortizing mortgages written for 15-25 years. Developers also use CTL financing for build-to-suit construction loans.

The ultimate credit tenant is the US Government. Uncle Sam still enjoys the highest possible credit rating and leases real estate all across the country. Federal court houses, Social Security Administration buildings, Department of Homeland Security field offices, and US Post Offices are all examples of buildings that have been purchased using a CTL mortgage loan.

Investment grade corporate tenants include the drug store chains, Walgreens and CVS, as-well-as, retail giants Walmart and Target. McDonald’s is, of course, the most popular credit tenant in the food service industry. Virtually any company that can boast of a superior credit rating and leases real estate on a NNN basis, can qualify for streamlined CTL financing.

CTL is a very specialized lending platform designed to accommodate a very specific type of commercial real estate investing. It is a very fast and efficient method of funding the purchase, refinance or development of a building that is NNN leased to a high quality tenant. CTL loans are perfect for the individual investor who buys income property or the small-to-midsized developer who builds only one or two projects at a time.

In a time of continuing economic turmoil and difficult credit markets, it’s nice to know that there are still dependable sources of commercial real estate lending. If you are buying, building or need to refinance a building that’s leased to a credit tenant you can depend on CTL financing.

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