Credit Tenant Lease (CTL) Loans Explained in Simple Terms

Credit tenant lease (CTL) financing is a unique lending platform designed for exclusive use with net leased real estate. Because of the distinctive nature of CTL loans they are only available through specialized CTL lenders.

What is Net Leased Real Estate?

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

When a tenant agrees to bear the burden of some or all of these significant expenses the rent will accordingly be lower but the liabilities of the tenant will be higher. Rent is said to be “net of” any expenses shouldered by the renter.

If a tenant is responsible for all three (tax, insurance, maintenance) of the extraordinary expenses the lease is described as being “triple net” (NNN). Triple net leases leave the property owner free of all responsibilities and liabilities concerning the real estate except paying the mortgage if it happens to be financed. Obviously net lease come in single and double net as-well.

Because a triple net lease pays monthly rent but places virtually no other requirements on the holder it is looked upon as 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 promises to make the payments.

What is a Credit Tenant?

Simply put, a credit tenant is a renter with good credit. A credit tenant will not only have the financial recourses to be able to make rent payments but will also have a strong legal and ethical incentive to stay current.

To be considered a credit tenant and be 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 prized of all.

What is CTL Finance?

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

When a credit tenant, net leased property is financed the lease is actually securitized and, in a sense, turned into a private placement corporate bond. At the same time a commercial real estate mortgage loan is underwritten against the property. The mortgage is coterminous (matching the length of the lease), fully amortized, and non 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 of the bond sale are used to fund the mortgage loan.

The lease and the mortgage are administered inside a trust and managed by a third party trustee who collects the rent, pays the mortgage and distributes any overage to the property owner.

Net lease real estate investors with credit tenants should consider CTL financing when deciding how to capitalize their property.

CTL offers permanent, non-recourse, fully amortized commercial mortgages with no restrictions on loan-to-value (up to 100% LTV) or loan-to-cost (up to 100% LTC) and is available for finance, refinance and construction and development including cash-out financing.