Commercial Mortgage Lender Explains Tenant Credit Lease Financing (CTL)

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

For the purposes of CTL loans, a credit lessee is defined as a corporate entity that has obtained an investment grade credit rating from major rating agencies. In general, any company rated below BBB- (minus triple B) by Standard & Poor’s or Baa3 by Moody’s is not considered investment grade and would not qualify for CTL financing.

CTL loans are very different from traditional commercial mortgage loans. Lenders originating 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 borrower’s credit. CTL lenders count the lease and the income it generates as the primary collateral behind the loan. This is a distinct difference from standard commercial real estate loans and represents a unique perspective on real estate financing.

CTL loans are possible due to the popularity of NNN leases among strong corporate lessees. When a landlord executes a true or “absolute” NNN lease with a good tenant, he has almost no administrative or operational responsibilities. The tenant is responsible for everything from paying utility bills to upkeep of the building, even large real estate issues like resurfacing the parking lot or replacing the HVAC system are the responsibility of the tenant, not the land owner . So a lender with a lien against a property leased by NNN doesn’t need much on the building to worry about either; even if they have to repossess it in a foreclosure, they won’t have to actually foreclose on it. For buildings with long-term NNN leases and great tenants, it makes sense for lenders to focus primarily on the lease.

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

Due to the direct nature of CTL financing loans, the amounts are often larger than other institutional loans. Many CTL lenders will not place loan-to-value or loan-to-cost restrictions and will underwrite 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 small debt service coverage ratio (DSCR) of just 1.01%-1.05%.

The 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 lengthy bureaucratic affairs.

Borrowers who take advantage of CTL financing tend to be sophisticated commercial real estate investors who understand the business of NNN investments. They typically seek long-term dependent income from their real estate holdings and want fixed, permanent financing. The terms of CTL loans are “co-terminal” with the term of the underlying lease and rates are generally locked in for the life of the loan. CTL loans are almost always self-liquidizing mortgages written for 15 to 25 years. Developers also use CTL financing for custom built construction loans.

The ultimate holder of the credit is the United States government. Uncle Sam still enjoys the highest possible credit rating and leases real estate across the country. Federal courthouses, Social Security Administration buildings, Department of Homeland Security field offices, and US Post Offices are examples of buildings purchased with a CTL home loan.

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 holder in the food service industry. Virtually any business that can boast a superior credit rating and that leases real estate on the basis of NNN can qualify for simplified CTL financing.

CTL is a very specialized lending platform designed to suit a very specific type of commercial real estate investment. It is a very fast and efficient method of financing the purchase, refinancing or development of a building that NNN leases to a high-quality tenant. CTL loans are perfect for the individual investor buying income properties or the small to medium developer building only one or two projects at a time.

In a time of continued economic turmoil and tough credit markets, it’s nice to know that reliable sources of commercial real estate loans still exist. If you’re buying, building, or need to refinance a building that’s leased to a credit-worthy tenant, you can rely on CTL financing.