Tenant Credit Lease (CTL) Loans Explained in Simple Terms
Credit Lease Lease (CTL) financing is a unique lending platform designed for use exclusively with net leased real estate. Due to the distinctive nature of CTL loans, they are only available through specialized CTL lenders.
What are net leased properties?
Net lease refers to the clauses in a real estate lease that specify which party (landlord or lessee) is responsible for property taxes, insurance, and maintenance.
When a tenant agrees to bear the burden of some or all of these significant expenses, the rent will be less, but the tenant’s responsibilities will be greater. Rent is said to be “net of” any expenses borne by the lessee.
If a tenant is responsible for all three (taxes, insurance, maintenance) of the extraordinary expenses, the tenancy is described as “triple net” (NNN). Triple net leases release the property owner from all responsibilities and obligations associated with real property, except for the mortgage payment if financed. Obviously, net leasing comes in single and double net as well.
Because a triple net lease pays a monthly rent but imposes virtually no other requirements on the holder, it is considered a financial instrument much like a bond. Like a bond, a triple net lease derives its value from the strength of the entity (tenant) that agrees to make the payments.
What is a credit tenant?
Simply put, a credit holder is a tenant with good credit. A credit tenant will not only have the financial resources to be able to pay their rent, but they will also have a strong legal and ethical incentive to keep up.
To be considered a credit lessee and eligible for CTL loans, a lessee must have an “investment grade” rating from one of the established corporate rating services, such as Standard & Poor’s or Moody’s.
Credit tenants are coveted by landlords, and credit tenants who rent on a triple net basis are the most prized of all.
What is CTL Finance?
CTL financing is a unique and highly specialized form of loan designed to work hand in hand with net credit lessee real estate. CTL loans are actually equity products that combine commercial mortgage lending with sophisticated investment banking.
When a lessee of credit, net leased property is financed, the lease is actually securitized and, in a sense, becomes a private placement corporate bond. At the same time, a commercial real estate mortgage loan is written against the property. The mortgage is adjoining (which coincides with the duration of the lease), fully amortized and without recourse.
The bond, which is backed by the lease, is then sold on the secondary market, usually to insurance companies or pension funds, but also to private investors. The proceeds from the sale of bonds are used to finance the mortgage loan.
The lease and mortgage are managed within a trust and are managed by a third-party trustee who collects the rent, pays the mortgage, and distributes any excess to the property owner.
Net lease real estate investors with credit tenants should consider CTL financing when deciding how to capitalize on their property.
CTL offers permanent, non-recourse, fully amortizing commercial mortgages with no loan-to-value (up to 100% LTV) or loan-to-cost (up to 100% LTC) restrictions and is available for financing, refinancing and construction. and development, including cash-out financing.