Commercial Mortgage Quick Reference Guide

Credit Tenant Lease

A credit tenant lease (CTL) is a long term lease agreement made between a property owner and a tenant with extremely good credit, typically a major corporation. Credit tenant leases are the basis for credit tenant lease (CTL) loans, which have some of the lowest default rates in the commercial finance industry. Unlike traditional commercial real estate loans, this type of financing is based mainly on the strength of the tenant, not the on the strength of the borrower.

Due to the relative safety of credit tenant loans, lenders are more likely to offer a borrower generous terms, including lower than average interest rates, LTVs up to 100% and DSCRs as low as 1.0x. In addition, credit tenant loans are generally non-recourse and do not require replacement reserves. Despite their benefits, borrowers should note that credit tenant lease loans are solely made for commercial properties and not for multifamily properties. Plus, qualifying can be a challenge; tenants must usually have a recognized corporate credit score of between AAA and BBB- for a borrower to obtain this type of financing.

Types of Credit Tenant Lenders

Overall, it’s much easier for borrowers to obtain financing if they want to take out a loan on a property with a CTL. Common credit tenant lenders include life insurance companies, who see CTL properties as a low-risk long-term investment, as well as CMBS lenders, who may want to reduce their overall portfolio risk (especially if they have already invested in riskier property types, such as hotels). There are also speciality CTL lenders, who only offer credit tenant financing with similar terms to life companies (i.e. fully amortizing loans with up to 25 year terms).

Types of Credit Tenant Leases

Just like typical leases, CTLs can come in several different varieties, though they are often NNN leases (triple net leases). Some CTLs are be structured as a bond lease, the most extreme form of NNN lease, colloquially referred to as a “hell-or-high-water” lease, since the tenant must generally continue to pay, no matter what happens to the property. On the other hand, CTLs can also be NN (double net leases), in which the landlord is responsible for a limited amount of repair and maintenance expenses. CTLs are rarely, if ever, gross leases, as this increases risks for landlords— which is exactly the opposite of what most landlords want when they seek out tenants for a credit tenant lease.

Credit Tenant Leases and Sale Leaseback

A sale leaseback occurs when a business that owns a property sells it to an investor with the agreement that they will be able to lease it out for a certain number of years at a predetermined rate. In many cases, sale leaseback transactions are structured as credit tenant leases. However, this is only the case when the seller (now tenant) is a large company with excellent credit. Companies may wish to engage in sale leaseback to free up capital for business expansion or to pay high-interest debts, especially when commercial real estate prices are high.

Challenges and Pitfalls of Credit Tenant Lease (CTL) Financing

While CTL financing has many benefits, it also has certain drawbacks. Credit rating agencies have slightly different (and somewhat stricter) requirements for CTL loans than traditional CMBS or other types of CRE financing. As previously mentioned, borrowers whose tenants have less than a BBB minus credit score typically won’t qualify. Due to a lack of careful underwriting by inexperienced lenders, borrowers who aren’t careful could see their loans fall apart at closing, costing them time and money. In addition, some CTL lenders may quote misleading numbers by using a different U.S. Treasury rate than the one that the loan will be based off of (i.e. 20 vs. 30 year Treasury rate), or slightly misrepresenting the amount of days over which interest is calculated, which could make things far more expensive over the long term.

These issues are much less likely to occur when a borrower deals with a true CTL lender (vs. a CMBS/conduit lender) as CTL lenders typically have expert in-house experts more versed in traversing regulatory hurdles. In addition, these lenders base their reputation solely on CTL loans, so they may be less likely to fudge spreads and mislead borrowers than larger shops that offer many different CRE financing options.

Credit Tenant Lease (CTL) Financing and Multifamily Loans

As CTL financing is not available for multifamily properties, large multifamily borrowers may wish to look towards other types of financing, including HUD multifamily loans, life company loans, CMBS, or Fannie Mae/Freddie Mac multifamily financing.


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