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Why Credit Tenant Lease (CTL) Loans Are Closing While Other Financing Is Stalled

In today’s volatile commercial real estate lending environment, people want to know what’s working and what’s not.

While there is an ongoing liquidity crisis for land loans and most development projects, we are seeing some loosening in funding for income producing commercial buildings with cash flow that covers the debt service. In particular, one bright spot has been credit tenant lease financing or CTL lending.

CTL loans are a unique kind of commercial mortgage that is designed to finance commercial real estate that is triple net leased (NNN) on a long-term basis to an investment grade tenant. CTL financing is a highly specialized type of commercial real estate investment banking and is generally not offered by typical banks or brokers.

The CTL segment of the real estate finance industry is relatively healthy compared to traditional commercial mortgage lending. In-fact, once CTL term sheet is drawn up and agreed, to it is exceedingly rare that a banker fails to fund the loan and close the deal.

There are several important reasons that CTL loans are closing at a brisk pace while other loans are being rejected or never reaching the closing table.

Unlike standard commercial mortgages, CTL loans are non-recourse loans that are primarily backed by the terms of the lease and the strength of the tenant rather than the financial wherewithal of the borrower and the intrinsic value of the real estate. In-short, if the lease and the tenant pass muster, the loan will close.

CTL loans can be originated with up-to a 100% loan-to-value (LTV) ratio that is subject to a very small debt-service-coverage ratio of about 1.01. These relaxed ratios make it easier for cash strapped investors to come up with the cash necessary to get a deal done.

Also, CTL loans are funded by the investment bank issuing and selling corporate bonds in the private placement market. The investment grade bond market has remained remarkably strong throughout this recession and funding loans in this manner is much easier than trying to pry money away from a bank or an insurance company.

Because CTL loans are only written against buildings NNN leased to strong tenants, it is much easier to get purchase, refinance and even construction & development loans funded and closed. All that is necessary is an investment grade tenant, such-as Walgreens, Wal-Mart, Target, or the US Government and a triple net lease that spans at-least 10 years.

This debt crisis and the corresponding recession have been painful for everyone especially for real estate investors in-need of dependable financing. The pain continues in many sectors but credit tenant lease financing remains strong and reliable.