Many good quality, single tenant, net leased properties qualify for both credit tenant lease (CTL) financing and conventional commercial mortgage lending. Net lease property investors should consider the pros and cons of each before deciding which type of loan to commit to.
CTL lending is generally best for the long term income investor who wants permanent, high leverage, fixed rate, fully amortized financing and desires speed and certainty of execution. Bank lending has a lower initial (but not overall) cost and can offer a larger variety of terms and conditions. Banks are best for investors who need options, don’t need maximum leverage (have large down-payment available), and who are not sure if they will hold a property for the long run.
CTL lending combines aspects of commercial mortgage lending with specialized investment banking in-order-to close deals. A CTL banker issues and sells private placement corporate bonds that are secured by the lease on the real estate. The proceeds of the bond sales are used to fund a commercial mortgage loan for the borrower. The loan is administered by a third party Trustee throughout the life of the deal.
Traditional commercial mortgages are standard loans secured by mortgage liens against the real estate, the income the property produces and the credit of the borrower. Banking institutions originate a loan and fund the deal either by selling the loan to an investor (private or Government) or by lending its own funds and holding the loan in its portfolio.
The ongoing credit crunch has forced banks to tighten up their lending criteria. It is highly unlikely that a commercial bank will offer any more than 75% loan-to-value (LTV) on any deal today. Banks have no incentive to take unnecessary risk; they can borrow money from the Fed (Federal Reserve Bank) at 0% percent and buy 10 year Treasury Bonds at 2% earning 2 points risk free. They will pass on high leverage loans and only lend where they have large amounts of protective equity.
CTL lenders will lend up to 100% LTV (lease fee valuation) on a non-recourse basis. They are in the business of loaning the full, current cash value of a lease (against the guaranteed future 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 1/3rd of the time it takes to close a conventional commercial mortgage. CTL deals have been known to be completed, from-start-to-finish, in as-little-as 45 days (unheard of in the world of commercial banking) but generally take 60.
Bank loans take at least 60 days, sometimes 180 or more. Also, because CTL deals either qualify or doesn’t, a banker can give a borrower a solid yes or no very quickly. There are a thousand ways a bank loan can fall through but, once a CTL banker commits to a deal and a borrower signs off, there is a near 100% certainty of execution.