A Credit Tenant Lease (CTL) or Conventional (Bank) Loan – Which Is Best for My NNN Deal?

December 22, 2020 Stan

Many good quality, single tenant, net leased properties qualify for both credit tenant lease (CTL) financing and conventional commercial mortgage lending. Net lease property investors should consider the pros and cons of each before deciding which type of loan to commit to.

CTL lending is generally best for the long term income investor who wants permanent, high leverage, fixed rate, fully amortized financing and desires speed and certainty of execution. Bank lending has a lower initial (but not overall) cost and can offer a larger variety of terms and conditions. Banks are best for investors who need options, don’t need maximum leverage (have large down-payment available), and who are not sure if they will hold a property for the long run.

The Difference

CTL lending combines aspects of commercial mortgage lending with specialized investment banking in-order-to close deals. A CTL banker issues and sells private placement corporate bonds that are secured by the lease on the real estate. The proceeds of the bond sales are used to fund a commercial mortgage loan for the borrower. The loan is administered by a third party Trustee throughout the life of the deal.

Traditional commercial mortgages are standard loans secured by mortgage liens against the real estate, the income the property produces and the credit of the borrower. Banking institutions originate a loan and fund the deal either by selling the loan to an investor (private or Government) or by lending its own funds and holding the loan in its portfolio.

Leverage

The ongoing credit crunch has forced banks to tighten up their lending criteria. It is highly unlikely that a commercial bank will offer any more than 75% loan-to-value (LTV) on any deal today. Banks have no incentive to take unnecessary risk; they can borrow money from the Fed (Federal Reserve Bank) at 0% percent and buy 10 year Treasury Bonds at 2% earning 2 points risk free. They will pass on high leverage loans and only lend where they have large amounts of protective equity.

CTL lenders will lend up to 100% LTV (lease fee valuation) on a non-recourse basis. They are in the business of loaning the full, current cash value of a lease (against the guaranteed future income). CTL bankers, without question, make the highest loan offers in the commercial real estate finance industry.

Speed and Certainty of Execution

CTL loans can close in about 1/3rd of the time it takes to close a conventional commercial mortgage. CTL deals have been known to be completed, from-start-to-finish, in as-little-as 45 days (unheard of in the world of commercial banking) but generally take 60.

Bank loans take at least 60 days, sometimes 180 or more. Also, because CTL deals either qualify or doesn’t, a banker can give a borrower a solid yes or no very quickly. There are a thousand ways a bank loan can fall through but, once a CTL banker commits to a deal and a borrower signs off, there is a near 100% certainty of execution.

Recourse

CTL loans are all non-recourse loans secured by the income that the lease produces.

Bank loans are usually, though not always, standard, credit driven, full recourse loans with liens against the borrower as well as the real estate.

Cost

A CTL loan will have higher initial costs because of the investment banking aspect to the deal and the fact that a third party Trustee must be involved. However, over the life cycle of a property, CTL tends to be less expensive because you never have to refinance. At the end of a CTL loan the borrower owns the property free and clear.

Bank loans must be recapitalized or paid off at the end of each term, usually 3, 5, 7 or 10 years. Having to refinance so often results in higher overall cost of capital.

Flexibility

CTL lending is somewhat less flexible than standard bank lending. The bonds sold by CTL bankers are regulated by the securities industries and the insurance industries. CTL lenders must adhere to very strict criteria and are not allowed to deviate from the standards. A deal qualifies for CTL or it does not; there is no leeway.

Banks generally have many lending platforms available to them; they are able to tailor a loan to a particular situation or a particular property.

Terms

Banks can offer self amortizing loans but generally issue mortgages with 3,5,7 or 10 year maturities amortized over 10-25 years with balloon payments due at the end of each term. Banks can also offer either fixed or adjustable rates.

CTL loans are all fully amortized, fixed rate, long term loans with terms coterminous with the lease.

In Summary

Banks offer a larger variety of loan products and can loan against more types of properties and tenants. Bank lending also tends to be less expensive in the short-run.

On the downside, banks are not inclined to offer high LTV loans and will generally require the borrower to guarantee a loan. Further, bank loans are notorious for falling through and failing to close for any number or reasons (or no reason at-all).

CTL loans are rigid in their qualification standards but close with near 100% certainty. They close faster and are less expensive over the life of a deal. CTL bankers place no restrictions on LTV or LTC (loan-to-cost) and are non-recourse loans. Also, it must be noted that CTL loans are administered by a third party Trustee throughout the entire life of a loan. The trustee will collect the rent, pay the mortgage and distribute the income to the borrower every month.

CTL loans are best for buy and hold investors who want to lock in today’s low rate for the long term. They are also appropriate for investors who need high leverage financing or who are looking to close as-soon-as-possible.

Bank loans are best for investors with deals that need some flexibility in the underwriting process. Bank loans will cost less up-front and more deals will qualify. Banks offer more loan choices to qualified borrowers.

Single tenant, net lease real estate investors who understand their options will be well equipped to make the best financing decisions for themselves and their businesses.