Many good quality single tenant net leased properties qualify for both credit tenant lease financing (CTL) and conventional commercial mortgage loans. Net lease property investors should consider the pros and cons of each before deciding what type of loan to commit to.
CTL loans are generally best for the long-term income investor who wants permanent financing, high leverage, fixed rate, fully amortized, and wants speed and certainty of execution. Bank loans have a lower initial cost (but not total) and can offer a greater variety of terms and conditions. Banks are best for investors who need options, don’t need maximum leverage (they have a large down payment available), and who aren’t sure if they will keep a property for the long term.
CTL loans combine aspects of commercial mortgage loans with specialized investment banking to close deals. A CTL banker issues and sells private placement corporate bonds that are secured by the lease of real estate. The proceeds from the sale of bonds are used to finance a commercial mortgage loan for the borrower. The loan is administered by a third party trustee during the term of the agreement.
Traditional commercial mortgages are standard loans secured by mortgage bonds against real estate, the income from the property, and the borrower’s credit. Banking institutions originate a loan and finance the deal, either by selling the loan to an investor (private or government) or by lending their own funds and keeping the loan in their portfolio.
To take advantage of
The current credit crisis has forced banks to toughen their lending criteria. It is highly unlikely that a commercial bank will offer more than 75% loan to value (LTV) on any deal today. Banks have no incentive to take unnecessary risks; They can borrow money from the Federal Reserve (Federal Reserve Bank) at 0% percent and buy 10-year Treasury bonds at 2% and earn 2 points without risk. They will transfer high-leverage loans and will only lend when they have large amounts of hedging capital.
CTL lenders will lend up to 100% LTV (Lease Rate Valuation) without recourse. They are in the business of lending the full present cash value of a lease (against future guaranteed income). CTL bankers, without question, make the highest loan offers in the commercial real estate finance industry.
Speed and certainty of execution
CTL loans can close in about 1/3 the time it takes to close a conventional commercial mortgage. CTL deals are known to be completed, start to finish, in as little as 45 days (unheard of in the commercial banking world), but typically take 60 days.
Bank loans take at least 60 days, sometimes 180 or more. Also, because CTL deals qualify or not, a banker can give a borrower a solid yes or no very quickly. There are a thousand ways a bank loan can fail, but once a CTL banker commits to a deal and a borrower signs, there is close to 100% foreclosure certainty.
CTL loans are all non-recourse loans secured by the income from the lease.
Bank loans are generally, but not always, standard, credit-driven, full recourse loans with liens against the borrower and the real estate.
A CTL loan will have higher upfront costs due to the investment banking aspect of the deal and the fact that a third-party trustee must be involved. However, during the life cycle of a property, CTL tends to be less expensive because you never have to refinance. At the end of a CTL loan, the borrower owns the property free and clean.
Bank loans must be recapitalized or paid off at the end of each term, typically 3, 5, 7, or 10 years. Having to refinance so frequently results in a higher total cost of capital.
CTL loans are somewhat less flexible than standard bank loans. The bonds sold by CTL bankers are regulated by the securities industries and the insurance industries. CTL lenders must meet very strict criteria and are not allowed to deviate from the standards. A deal qualifies for CTL or not; there is no room for maneuver.
Banks generally have many loan platforms available; they can tailor a loan to a particular situation or a particular property.
Banks can offer self-amortizing loans, but generally issue mortgages with maturities of 3,5,7 or 10 years, amortized in 10-25 years with balloon payments at the end of each term. Banks can also offer fixed or adjustable fees.
CTL loans are all long-term, fixed-rate, fully amortized loans with terms that match the lease.
Banks offer a greater variety of loan products and can make loans against more types of properties and tenants. Bank loans also tend to be less expensive in the short term.
On the downside, banks are unwilling to offer high LTV loans and will generally require the borrower to guarantee a loan. Also, bank loans are notorious for failing and not closing for any number or reasons (or no reason at all).
CTL loans are rigid in their rating standards, but close with close to 100% certainty. They close faster and are less expensive over the life of a deal. CTL bankers do not place restrictions on LTV or LTC (loan at cost) and are non-recourse loans. Also, it should be noted that CTL loans are administered by an outside trustee throughout the life of a loan. The trustee will collect the rent, pay the mortgage, and distribute the proceeds to the borrower each month.
CTL loans are best for buying and retaining investors who want to keep today’s low rate for the long term. They are also appropriate for investors who need high-leverage financing or are looking to close as soon as possible.
Bank loans are best for deal investors who need some flexibility in the underwriting process. Bank loans will cost less upfront and qualify for more deals. Banks offer more loan options to qualified borrowers.
Single-lease net lease real estate investors who understand their options will be well equipped to make the best financing decisions for themselves and their businesses.