Credit Tenant Lease (CTL) Loans – An Investment Banker Compares Bank Lending to CTL Finance

September 13, 2020 Stan

A good credit tenant lease (CTL) banker is the best friend of the commercial real estate owner who invests in single tenant buildings that are triple net (NNN) leased to credit worthy tenants, because CTL bankers can turn those leases into gold.

Credit tenant lease lending is a highly specialized investment banking process used by NNN investors to monetize the intrinsic value of a long term lease. In some ways CTL loans are indistinguishable from standard commercial mortgage loans, but in other important way they are very different.

Banks fund traditional commercial mortgages by either lending a borrower funds they have on deposit or by originating then selling the mortgage to an institutional investor or a Government Sponsored Entity such as Fannie Mae. CTL loans, on-the-other-hand, are funded by investment bankers who issue private placement bonds that are sold by brokers and traders to fixed income investors.

Standard bank loans are backed primarily by the value of the real estate and the financial wherewithal of the borrower. CTL loans are secured first and foremost by the lease that is associated with the real estate rather than the property itself. CTL loans are non-recourse mortgages so the finances of the borrower are not an overriding factor.

Banks require minimum down payments of 20-25% so they can meet their 75-80% loan-to-value (LTV) requirements. They also have strict debt-service-coverage ratio (DSCR) that often top 1.2x. CTL loans are high leverage loans with no restrictions on LTV (100% LTV) and very low DSCR of around 1-1.01x.

Time is money and banks can take forever to close a commercial mortgage. 90-180 days is typical for institutional loans. The red tape and documentation is a bureaucratic nightmare. Conversely, CTL is a streamlined process with few surprises. If a loan gets passed the application stage, it is exceedingly rare that a deal fails to close. Basically, if the tenant and the lease pass muster the deal will fund. CTL deals take only 45-60 days to complete from start-to-finish.

Finally it’s important to note that a CTL loan is the last loan a building will ever need. CTL loans are long-term, usually co-terminus with the length of the lease (up-to 25 years). They are also fixed rate, self amortizing loans so property owners never have to worry about balloon payments or rising interest rates. Bank loans need to be refinanced every 3, 5, or 7 years at substantial cost and aggravation.

Not every property qualifies for CTL financing; the building must be “stand alone” and the lease must be NNN and have a term of at least 10 years. Tenants must qualify also; they have to be considered “investment grade” by the big credit rating agencies. However, if a deal does qualify sponsors will find CTL a dependable source of capital for the purchase, refinance and development of NNN leased real estate.