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CTL: Credit Tenant Leases in Commercial Real Estate
A credit tenant lease (CTL) is a form of commercial real estate financing in which a loan is given for a property with a long-term lease (usually 10+ years), typically held by a nationally recognized tenant with a high credit rating.
What is a Credit Tenant Lease in Commercial Real Estate?
A credit tenant lease (CTL) is a form of commercial real estate financing in which a loan is given for a property with a long-term lease (usually 10+ years), and is typically held by a nationally-recognized tenant with a high credit rating. This usually includes large regional or national companies, as well as government tenants. To qualify, tenants generally must have a credit rating between AAA and BBB-minus. Due to the additional security of having a high-credit tenant, lenders are often significantly more flexible when it comes to loan terms for CTLs.
CTLs are typically negotiated as triple net (NNN) leases, in which a tenant is responsible for most or all repair and maintenance (R&M) costs. However, credit tenant leases are sometimes arranged as double net (NN) leases, which can increase cash on cash returns for a landlord, but will increase their overall risk, especially as a property grows older. Credit tenant lease loans are typically coterminous (i.e., ending at the same time) as the lease itself.
Benefits of Credit Tenant Leases
Credit tenant leases typically have a variety of benefits, including:
Higher LTV allowances, often 95-100%
Higher DSCR allowances, often 1.00-1.05x
Long-term, fixed-rate loans (often up to 25 years or more)
Consistent income and less risk for investors
Less management cost than multi-tenant properties
CTLs are typically non-recourse loans
Replacement reserves are not typically required
What is a Credit Tenant Lease (CTL) in commercial real estate?
A Credit Tenant Lease (CTL) is a form of commercial real estate financing in which a loan is given for a property with a long-term lease (usually 10+ years), and is typically held by a nationally-recognized tenant with a high credit rating. This usually includes large regional or national companies, as well as government tenants. To qualify, tenants generally must have a credit rating between AAA and BBB-minus.
CTLs are typically negotiated as triple net (NNN) leases, in which a tenant is responsible for most or all repair and maintenance (R&M) costs. However, credit tenant leases are sometimes arranged as double net (NN) leases, which can increase cash on cash returns for a landlord, but will increase their overall risk, especially as a property grows older. Credit tenant lease loans are typically coterminous (i.e., ending at the same time) as the lease itself.
CTL loans have some of the lowest default rates in the commercial finance industry, and lenders are more likely to offer a borrower generous terms, including lower than average interest rates and even LTVs of up to 100%.
What are the benefits of a Credit Tenant Lease (CTL) for a commercial real estate investor?
Credit tenant leases typically have a variety of benefits, including:
- LTV allowances, often 95-100%
- DSCR allowances, often 1.00-1.05x
- Long-term, fixed-rate loans (often up to 25 years or more)
- Consistent income and less risk for investors
- Less management cost than multi-tenant properties
- CTLs are typically non-recourse loans
- Replacement reserves are not typically required
What are the risks associated with a Credit Tenant Lease (CTL) in commercial real estate?
The risks associated with a Credit Tenant Lease (CTL) in commercial real estate include:
- CTL financing has a reputation for falling apart at the last minute, often due to the fact that many CTL loans are securitized and lenders may not understand agency rating requirements.
- Spreads may creep up on borrowers unexpectedly.
- Certain lenders may use tricks, such as quoting a slightly different index or accrual period than the one that will actually be used, giving borrowers the impression that their interest rate will end up being lower than it really is.
- Many lenders may require a borrower to purchase lease enhancement insurance, which could add up to 0.25% to a borrower’s annual interest rate.
- Credit rating agencies have slightly different (and somewhat stricter) requirements for CTL loans than traditional CMBS or other types of CRE financing.
- Borrowers whose tenants have less than a BBB minus credit score typically have difficulty obtaining CTL financing.
To avoid these risks, borrowers who want to secure the best terms on a CTL loan may wish to seek out a dedicated credit tenant lender with significant experience in originating and closing this type of financing. In addition to reducing the chance of major risks, dedicated and experienced CTL lenders will likely be able to devote more personalized attention to borrowers and may be significantly more flexible with the loan terms they are willing to provide. Source
What are the key considerations when evaluating a Credit Tenant Lease (CTL) in commercial real estate?
When evaluating a Credit Tenant Lease (CTL) in commercial real estate, there are several key considerations to keep in mind. First, tenants must usually have a recognized corporate credit score of between AAA and BBB- for a borrower to obtain this type of financing. Second, CTL financing has a reputation for falling apart at the last minute, often due to the fact that many CTL loans are securitized and lenders may not understand agency rating requirements. Third, spreads may also creep up on borrowers unexpectedly; certain lenders are known to use certain tricks, such as quoting a slightly different index or accrual period than the one that will actually be used. Fourth, many lenders may require a borrower to purchase lease enhancement insurance, which could add up to 0.25% to a borrower’s annual interest rate. Finally, borrowers who want to secure the best terms on a CTL loan may wish to seek out a dedicated credit tenant lender with significant experience in originating and closing this type of financing.
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What are the tax implications of a Credit Tenant Lease (CTL) in commercial real estate?
The tax implications of a Credit Tenant Lease (CTL) in commercial real estate depend on the type of lease and the structure of the loan. Generally, CTLs are structured as triple net (NNN) leases, in which the tenant is responsible for most or all repair and maintenance (R&M) costs. In this case, the landlord is not responsible for any of the R&M costs, and the tenant is responsible for all of the taxes associated with the property. However, CTLs can also be structured as double net (NN) leases, in which the landlord is responsible for some of the R&M costs, and the tenant is responsible for the remaining taxes associated with the property.
In either case, the landlord is typically responsible for the taxes associated with the loan itself, such as interest payments and other loan-related costs. Additionally, the landlord may be responsible for any capital gains taxes associated with the sale of the property.
It is important to consult with a tax professional to determine the exact tax implications of a CTL in commercial real estate.
Credit Tenant Leases and Sale-Leaseback
Credit tenant leases are often engaged as part of a sale-leaseback transaction, in which an investor purchases a commercial property and leases it back to the previous owner at a set rate for an extended period of time (often 20-30 years). Whether a CTL involves a sale-leaseback transaction or just a regular lease, the tenant often has the ability to purchase the property at a certain point; either for a fixed amount or for the property's fair market value.
Despite Benefits, CTL Borrowers Face Certain Risks
While credit tenant lease financings do offer some incredible benefits for borrowers, they aren’t without their risks. CTL financing has a reputation for falling apart at the last minute, often due to the fact that many CTL loans are securitized and lenders may not understand agency rating requirements. In many situations spreads may also creep up on borrowers unexpectedly; Unfortunately, certain lenders are known to use certain tricks, such as quoting a slightly different index or accrual period than the one that will actually be used. This can give borrowers the impression that their interest rate will end up being lower than it really is. In addition, many lenders may require a borrower to purchase lease enhancement insurance, which could add up to 0.25% to a borrower’s annual interest rate.
To avoid these risks, borrowers who want to secure the best terms on a CTL loan may wish to seek out a dedicated credit tenant lender with significant experience in originating and closing this type of financing. In addition to reducing the chance of major risks, dedicated and experienced CTL lenders will likely be able to devote more personalized attention to borrowers. They may be significantly more flexible with the loan terms they are willing to provide.