Credit Tenant Lease (CTL) Loans Explained in Plain Terms

Real Estate

Tenant Credit Lease Financing (CTL) is a unique lending platform designed for exclusive use with net leased real estate. Due to the distinctive nature of CTL loans, they are only available through specialized CTL lenders.

What is net leased real estate?

Net lease refers to clauses in a real estate lease that specify which party (owner or tenant) is responsible for taxes, insurance, and maintenance of the property.

When a tenant agrees to bear the burden of some or all of these major expenses, the rent will consequently be lower but the tenant’s responsibilities will be greater. The rent is said to be “net of” the expenses incurred by the tenant.

If a tenant is responsible for all three (taxes, insurance, maintenance) of extraordinary expenses, the lease is described as “triple net” (NNN). Triple net leases leave the property owner free of all responsibilities and obligations related to real estate, except for paying the mortgage if it is financed. Obviously, the net lease also comes in a single and double network.

Because a triple net lease pays a monthly rent but imposes virtually no other requirements on the holder, it is considered a financial instrument very similar to 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 tenant on credit?

Simply put, a tenant with credit is a tenant with good credit. Not only will a tenant on credit have the financial resources to pay the rent, but they will also have a strong legal and ethical incentive to keep up.

To be considered a credit tenant and eligible for CTL loans, a tenant must be rated “investment grade” by one of the established corporate rating services, such as Standard & Poors or Moody’s.

Credit tenants are coveted by landlords and credit tenants who rent on a triple net basis are the most valued of all.

What is CTL Finance?

CTL Finance is a unique and highly specialized form of lending designed to work hand-in-hand with net leased credit tenant real estate. CTL loans are actually securities products that combine commercial mortgage loans with sophisticated investment banking.

When a lessee is financed on credit, net leased property, the lease is actually securitized and, in a sense, becomes a corporate private placement bond. At the same time, a commercial real estate mortgage loan is written against the property. The mortgage is adjoining (coinciding 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 administered within a trust and are administered by a third-party trustee who collects the rent, pays the mortgage, and distributes any excess to the owner.

Net leasing 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.

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