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 loans, which have some of the lowest default rates in the commercial finance industry. Due to the relative safety of credit tenant loans, lenders are more likely to offer a borrower generous terms for this type of financing.

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 negates the reduced risk a landlord will experienced based on the tenant’s high level of credit.

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).

As a result of their reduced risk profile, borrowers can expect lower interest rates for CTL loans as well as higher LTV allowances (sometimes up to 100%) and lower DSCR requirements (sometimes as low as 1.0x). In addition, credit tenant loans are generally non-recourse.

Credit Tenant Leases and Sale Leaseback

In many cases, a sale leaseback, in which 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, is also a credit tenant lease. This, of course, 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. Borrowers who aren’t careful could see their loans fall apart at closing due to a lack of careful underwriting. 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.

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