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

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.