Commercial Mortgages – The Benefits of Credit Tenant Lease Financing

Credit tenant lease (CTL) financing is a very unique and highly specialized form of commercial mortgage loans designed to provide financing for the purchase, refinancing and construction of properties that are leased triple net (NNN) to creditworthy tenants.

Unlike traditional commercial mortgage loans, CTL loans are underwritten based on the financial strength of the tenant and the structure of the lease rather than the underlying value of the property and the borrower’s credit. With CTL loans, the lease and guaranteed income are the primary collateral backing the loan.

Due to the straightforward nature of CTL financing, these loans provide NNN investors with several key benefits.

  • Highest loan amounts

CTL lenders generally do not impose loan-to-value restrictions and lend up to 100% LTV. There are also no restrictions on loan-to-cost (100% LTC) for construction loans. The only condition is that the rent collected must cover the mortgage payment. (Debt Service Coverage Ratios [DSCR] are very low, usually 1.01-1.05) CTL financing offers the very highest loan amounts. The amount of potential leverage is unrivaled in the commercial real estate industry today.

  • Speed ​​of execution

CTL loans are a streamlined process that takes much less time than bank loans or other typical commercial mortgages. An average CTL loan can be completed in 60 days or less from start to finish. Loans from Wall Street bankers, Hartford insurance companies and commercial banks are notorious for being lengthy, bureaucratic affairs that can take 90 to 200 days to complete.

  • No story

Property owners appreciate the fact that CTL loans are non-recourse mortgages. The lease is the collateral; lenders don’t come after borrowers when things go wrong.

  • Long-term financing

The term of a CTL loan usually coincides with the term of the lease. Many tenants sign leases of 10, 20 or even 25 years. CTL financing is often the last loan an investor will ever need. If they sell the building, the new owners can simply take over the CTL loan. If they keep the building, they won’t have to worry about refinancing for a long time.

  • Fixed rate, self-depreciating

Virtually all CTL loans are fixed for the life of the loan. Investors can confidently plan for the future because they know for sure what their debt service will cost. CTL mortgages also automatically amortize over the life of the loan, so property owners don’t have to worry about coming up with money for balloon payments.

  • Construction finance

Nearly all other lenders have significantly curtailed construction and development financing, but CTL capital is still readily available to finance the construction of buildings that will be leased to investment-grade tenants.

  • Many tenants qualify
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The US government is still the ultimate ‘credit tenant’. Anyone purchasing or developing a building that will house a government administrative office or federal courthouse will find it relatively easy to obtain a CTL loan. Several retail companies also meet the requirements for CTL financing in the private sector. Drugstore chains Walgreens and CVS are among the most popular, as are home improvement giants Home Depot and Lowes. Wal-Mart is also a very prominent CTL financing candidate. Virtually any real estate tenant who enjoys an investment grade credit rating (BBB or higher) from one of the major credit bureaus, and rents space on an NNN basis, can qualify for CTL loans.

CTL loans are one of the best ways to finance NNN leased real estate. In this era of tight credit and nervous lenders, property owners, investors and developers with top quality tenants have a source of funding they can rely on.