Commercial Mortgage Lender Explains Credit Tenant Lease (CTL) Financing
Tenant Lease Financing (CTL) is a unique commercial mortgage lending platform designed to finance the purchase, refinance and development of single and triple tenant network (NNN) leasehold premises. The premises can be retail, office, industrial or warehouse; CTL loans can be written against any property as long as it is occupied by a “credit tenant”.
For the purpose of CTL lending, a credit lessee is defined as a corporate entity that has received an investment grade credit rating from major rating agencies. In general, any company rated less than BBB- (three times B minus) by Standard & Poor’s or Baa3 by Moody’s, is not considered investment grade and will not be eligible for CTL funding.
CTL loans are very different from traditional commercial mortgage loans. Lenders who originate CTL financing are primarily interested in the structure of the lease and the tenant’s strength rather than the value of the property or the borrower’s credit. CTL lenders count the lease and the income it generates as the main collateral backing the loan. This is a distinct difference compared to standard commercial real estate lending and represents a unique perspective on real estate financing.
CTL lending is possible due to the popularity of NNN leases among powerful corporate tenants. When a landlord performs a true or “absolute” NNN lease with a good tenant, he or she has virtually no management or operational responsibilities. The tenant is responsible for everything from paying utility bills to maintaining the building, and 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 landowner. Thus, a lender with a lien against a NNN leased property need not worry so much about the premises; Even if they had to redeem it in the foreclosure, they wouldn’t have to actually run it. For buildings with long-term NNN leases and premium tenants, it makes sense for lenders to focus primarily on the lease.
CTL loans are originated by commercial mortgage bankers or direct CTL lenders. Bankers will issue and sell private mortgage securities in order to fund the CTL. Direct lenders also guarantee the lease in bonds, but often hold the debt in their own portfolios rather than selling it on the secondary market.
Because of the straightforward nature of loan financing loans, loan amounts are usually larger than loans from other institutions. Many CTL lenders will not set any loan-to-value or loan-to-cost restrictions and will write the maximum possible loan. The only real requirement for the size of the loan is that the rent collected must cover the mortgage payment. Most CTL lenders require a tiny Debt Service Coverage Ratio (DSCR) of only 1.01% – 1.05%.
Speed of execution is another advantage of CTL loans. It only takes 45-60 days, from start to finish, to complete a Certificate Trusted List (CTL) transaction. On the other hand, bank loans are notorious for being drawn-out bureaucratic affairs.
Borrowers who benefit from CTL financing tend to be sophisticated commercial real estate investors who understand the business of NNN investing. They are generally looking for reliable and long term income from their real estate holdings and they want permanent and steady financing. The terms of CTL loans are “co-term” with the term of the base lease and rates are usually fixed for the life of the loan. CTL loans are almost always 15-25 year self-depreciating mortgages. Developers also use CTL financing for appropriate construction loans.
The final tenant of the trust is the United States government. Uncle Sam still has the highest possible credit rating and rents properties across the country. Federal courthouse buildings, Social Security Administration buildings, Department of Homeland Security field offices, and U.S. Post offices are examples of buildings purchased using a CTL mortgage.
Investment-grade corporate tenants include drugstore 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. Practically any company that can boast of an outstanding credit rating and rent properties on a NNN basis can qualify for CTL simplified financing.
CTL is a highly specialized lending platform designed to accommodate a very specific type of commercial real estate investment. It is a very fast and efficient way to finance the purchase, refinance or development of a NNN leasehold building for a quality tenant. CTL Loans are ideal for the individual investor purchasing income properties or the small to medium sized developer who is building only one or two projects at a time.
In a time of ongoing economic turmoil and tough credit markets, it is good to know that there are still reliable sources of commercial real estate lending. If you are buying, building, or need to refinance a building that is rented to a credit tenant, you can count on CTL financing.
