A long-term lease known as a credit tenant lease (or CTL) uses the tenant’s creditworthiness as security for a loan on commercial real estate.
The lender, who is frequently a bank, life insurance provider, or CMBS lender, consents to extend credit to the owner of the building that the credit tenant is renting. MG Developments Group
Major businesses, universities, and government organisations frequently use CTLs when looking to rent space in upscale office buildings or sizable shopping malls. Typical credit tenant lease durations range from 10 to 15 years.
Lenders frequently provide borrowers with LTVs up to 100%, DSCR criteria as low as 1.0x, and lower interest rates since CTL loans are thought to be less risky than conventional commercial real estate loans. Since credit tenant loans are normally non-recourse, lenders frequently waive the demands for replacement reserves. MG Group Egypt
Requirements For Credit Tenants
As was already indicated, a lender’s decision to offer a CTL loan is primarily based on the tenant’s creditworthiness. To be eligible for a CTL, the renter will likely need to have a high credit score, according to the lender. For leases with credit tenants, typical corporate credit standards range from AAA to BBB.
Along with creditworthiness, the lease’s conditions should ensure that the tenant will stay put for the loan’s whole period (often 10-15 years). Due of these factors, CTLs are rarely applied to real estate that is leased to individuals or small businesses.
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A borrower with excellent financials who does not yet have a public credit rating might be able to obtain one in order to be eligible for CTL financing for particularly large CTL loans, which are frequently $7.5 million or more.
Different Types Of Credit Tenants
Bond leases, triple net (NNN) leases, double net (NN), and modified gross leases are some of the different types of CTLs (MG leases).
Bond Leases: The most typical CTL is a bond lease. In a bond lease, also known as an absolute net lease, the tenant makes a commitment to cover all operating and non-operating expenses. The most extreme type of lease is a bondable lease, which typically requires the tenant to pay for building repairs even in the event of a disaster or “act of God” like a fire, hurricane, tornado, or other natural calamity.
NNN Leases: Another sort of lease employed in credit tenant lease situations is the triple net lease, or NNN lease. In a triple net lease, in addition to the rent, the tenant is also responsible for all real estate taxes, insurance payments, and common area maintenance costs. NNN leases frequently permit the tenant to end the lease in the event of a natural disaster or the partial loss of the property, unlike bond leases.
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Future Conditions for CTL Loans
A CTL loan often has the following terms:
- Size: at least $5 million
- Up to 100% LTV
- DSCR: 1-1.05x (decided by lease structure) (determined by lease structure)
- Term: 10 to 25 years, coterminous with the remainder of the lease period.
- Amortization: In most cases, loans are fully amortised.
- Lease: Modified Gross, NNN, Bondable
- Yield maintenance at U.S. Treasury Rate plus 50 bps as a prepayment penalty
- CTL Financing Rates: 4.48 percent as of now
- CTL loans are frequently assumable for buyers, normally for a 1% fee.
- Recourse: The majority of loans have normal “bad boy” carve-outs and are entirely non-recourse.
Loans for construction:
- offer leverage often up to 90% LTC.
- During the construction phase, loans are interest-only (I/O).
- One closure construction-to-permanent loan structures are available.
- Only during the construction phase are loans recourse; after the building is finished and completely leased, loans are no longer recourse.
- All contractors are required to provide surety bonds.
- A CTL lease must typically be signed by the credit tenant before construction may begin.
Credit Tenant Leases : Pros And Cons
Credit tenant leasing finance includes a number of benefits as well as drawbacks. Among the benefits and drawbacks of CTL loans are:
- high levels of interest rate competition.
- Long loan durations, frequently exceeding 30 years.
- Highest permitted leverage, up to 100% LTV.
- Low requirements for DSCR.
- Closing times that could be extended and extensive paperwork requirements
- Poor underwriting may cause loan applications to fail before closing (especially if a CMBS/conduit lender is employed).
- When quoting interest rates, lenders frequently use a different U.S. Treasury rate than the one that would be used to determine the loan’s interest rate or give an incorrect number of days.
A credit renter looking to get a CTL loan should generally engage with a specialised CTL lender. This raises the likelihood that the loan will close smoothly and lowers the possibility that a prospective borrower will be given an inaccurate interest rate quote. Dedicated CTL lenders frequently employ teams of underwriters who are experts in bond ratings and can help the borrower achieve a quicker, less arduous closing.