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In the Spotlight: Credit Tenant Lease Financing
While credit tenant loans represent a relatively small scope of overall financing transactions, they are a noteworthy addition to the finance realm due to their creative structures and strong performance. As various financial sources predict that the commercial real estate finance sector is expected to continue on its upward swing, there is a sense that a wider breath of financing structures will be attractive to lenders.
Definition and Description
A credit tenant lease (CTL) is an alternative method of financing real estate based on the credit standing of a major tenant. Generally, this form of financing is structured with an assignment of the rental payments to the lender with the real property pledged as collateral in the form of a first lien. The underlying credit or the tenant's ability to pay rent is the focus of the underwriting for each particular loan.
Although CTL loans can be made on all types of property, they often are utilized in the sale/leaseback or build-to-suit of corporate headquarters, office buildings, warehouses, distribution centers or retail stores.
CTLs offer real estate owners and developers the opportunity for better terms and conditions for their financing transaction. The advantages of CTL financing include: better loan to value ratios for financing up to 100%; no limit on loan dollars per square foot; and one-step construction and permanent loan financing.
Types of Credit Tenant Leases
There are four categories of CTLs according to the Purposes and Procedures Manual (P&P Manual) of the National Association of Insurance Commissioners (NAIC) Securities Valuation Offices, December 2012 Edition. The four categories include: 1) Bond Lease; 2) Credit Lease; 3) Acceptable Credit Tenant Loan Variants (ACVs); and 4) Multiple Property Transactions (MPTs).
CTLs are attractive investment structures to lender parties since there is less prepayment risk and the monthly cash flow is certain. Lenders will be interested in eliminating or diminishing any risk that a tenant may terminate a lease or a tenant will be relieved of its obligation to pay monthly rent.
CTL financing is a viable option if: 1) the premises is completely constructed with the tenant in possession and paying rent; or 2) the underlying real property has yet to be acquired and the premises is not constructed, but a tenant is in negotiations for the leased premises. In the latter circumstance, the construction risk will need to be mitigated with an acceptable letter of credit or an escrow allowing the loan to be fully repaid if the construction is not completed within a specific time period.
Conclusion
As with any transaction secured by real property, it is important to review the lease, title and other due diligence documents, such as the environmental site assessment and any engineering reports.
While credit tenant loans represent a relatively small scope of overall financing transactions, they are a noteworthy addition to the finance realm due to their creative structures and strong performance. As various financial sources predict that the commercial real estate finance sector is expected to continue on its upward swing, there is a sense that a wider breath of financing structures will be attractive to lenders.
Definition and Description
A credit tenant lease (CTL) is an alternative method of financing real estate based on the credit standing of a major tenant. Generally, this form of financing is structured with an assignment of the rental payments to the lender with the real property pledged as collateral in the form of a first lien. The underlying credit or the tenant's ability to pay rent is the focus of the underwriting for each particular loan.
Although CTL loans can be made on all types of property, they often are utilized in the sale/leaseback or build-to-suit of corporate headquarters, office buildings, warehouses, distribution centers or retail stores.
CTLs offer real estate owners and developers the opportunity for better terms and conditions for their financing transaction. The advantages of CTL financing include: better loan to value ratios for financing up to 100%; no limit on loan dollars per square foot; and one-step construction and permanent loan financing.
Types of Credit Tenant Leases
There are four categories of CTLs according to the Purposes and Procedures Manual (P&P Manual) of the National Association of Insurance Commissioners (NAIC) Securities Valuation Offices, December 2012 Edition. The four categories include: 1) Bond Lease; 2) Credit Lease; 3) Acceptable Credit Tenant Loan Variants (ACVs); and 4) Multiple Property Transactions (MPTs).
CTLs are attractive investment structures to lender parties since there is less prepayment risk and the monthly cash flow is certain. Lenders will be interested in eliminating or diminishing any risk that a tenant may terminate a lease or a tenant will be relieved of its obligation to pay monthly rent.
CTL financing is a viable option if: 1) the premises is completely constructed with the tenant in possession and paying rent; or 2) the underlying real property has yet to be acquired and the premises is not constructed, but a tenant is in negotiations for the leased premises. In the latter circumstance, the construction risk will need to be mitigated with an acceptable letter of credit or an escrow allowing the loan to be fully repaid if the construction is not completed within a specific time period.
Conclusion
As with any transaction secured by real property, it is important to review the lease, title and other due diligence documents, such as the environmental site assessment and any engineering reports.
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