By: Andrew Fallon
Debt financing, what debt financing? The capital markets remain dysfunctional, forcing borrowers to utilize alternative sources of capital. Fortunately, net lease property developers and investors can, and have been taking advantage of CTL financing.
Credit tenant lease (CTL) financing is a non-traditional type of commercial real estate loan that allows borrowers to “leverage-up” based on the predictable income streams of long-term leases. CTL financing provides substantial debt levels based on the credit-quality of the tenant, and the net lease structure securing the asset. The collateral is the long-term lease, not the physical real estate. Lenders are comfortable providing funds knowing that an investment-grade tenant’s monthly rent check will be paying the mortgage balance. Because CTL financing is based on the creditworthiness of the tenant rather than the creditworthiness of the borrower, developers and investors can access debt to build and purchase net lease properties, which continue to trade competitively in today’s market.
CTL can be a valuable source of capital given its key advantages over traditional financing. These advantages include maximum loan proceeds and lower debt service coverage requirements. CTL loans are characterized by their high LTVs (85% - 100%) and low debt service coverage ratios (1.10 – 1.25 DCS). If you are considering the purchase or development of a net lease property, then you might want to explore the CTL financing opportunities available for your tenant.
CTL recently in the news:
Walgreens Lending: A Victim of Its Own Success
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