CREDIT TENANT LEASE (CTL) FINANCING _ CBRE

CREDIT TENANT LEASE (CTL) FINANCING   

Credit Tenant Lease (CTL) financing is an effective alternative for financing in today's commercial real estate market. For higher credit entities, CTL financing offers one of the most liquid and aggressive forms of debt for asset monetization. While traditional real estate loans are written against the value of the real estate, CTL loans rely on the credit quality of the tenant and the structure of the lease to establish the cost of borrowing. The estimated CTL finance market size is in excess of $5 billion per year.  

Two Basic Criteria for CTL Financing   

1. Companies (lessees) must have investment grade credit or equivalent. For unrated entities, most CTL lenders will require a private rating through the National Association of Insurance Commissioners (NAIC), with the results achieving a designation of not less than NAIC 2. This is a quick and relatively inexpensive process.  

2. A net lease structured for a specified, non-cancellable period of time. A fully net, or bondable, lease allows for up to a 1.0x coverage; a lease with lessor responsibilities will be less than a 1.0x coverage and may require additional reserves.  

CTL Financing Overview   

A CTL loan is a credit-based debt instrument that can assume little, if any, real estate risk.  This requires that CTL loans be fully amortizing and coterminous with the lease.  There are a few methods by which balloons can be structured to increase proceeds or reduce the required rent covering debt service. These include residual value insurance and various forms of mezzanine or B-notes.  Opportunities for these applications are made by exception.  

CTL Financing can be based on any length of lease, with better economics achieved through longer terms because of amortization. For this reason, leases supporting CTL loans are often for terms of 20 years or more.   

The rate on a CTL loan is comprised of three components: • the underlying index • the corporate credit spread • the CTL spread 

 

The underlying index is typically the average life interpolated U.S. Treasury rate. The corporate credit spread mirrors where bonds attributable to the lessee would trade in the open market for the matched maturity. The CTL spread is the small premium associated with the lease financing structure to compensate for the indirectness to the credit (via a lease), the limited liquidity of the loan, and the risk of lease cancellation in the event of bankruptcy. The nature of the borrower is of less concern, as the rental payments are assigned to the CTL lender and the asset is pledged as collateral in the form of a first lien.  

A CTL loan uses the lease as the vehicle for financing.  Loan proceeds are generated from the discounted value of the net income stream from the lease.  This is sold to institutional bond investors, typically through a non-rated private placement

Advantages of CTL Financing  

• Leverages credit strength of a company to achieve rates close to the lessee’s corporate cost of borrowing • Non-recourse to the borrower/lessor  • Interest rates are typically fixed for extended periods equal to lease term • Debt service coverage ratios as low as 1.0x • No maximum Loan-to-Cost (can be over 100% of costs), and unconstrained by tradition valuation methodologies • Generally requires no financial or operating covenants typical of corporate finance instruments • Loan proceeds can be used for construction on build-to-suit projects.   

CTL Financing has many advantages over conventional mortgages and other forms traditional real estate financing in applications where strong credit and lease structure combine. CTL Financing can provide an attractive source of debt for various forms of real estate monetization.   

CBRE Corporate Capital Markets provides capital markets advisory and execution expertise for planned or existing single-tenant assets on behalf of corporate occupiers, developers and owners.     

For more information contact:   

Jeffrey W. Shell Executive Vice President Corporate Capital Market CBRE, Inc.  Tel: 313.417.2100  Email: jeffrey.shell@cbre.com