Credit tenant lease is a method of financing real estate where the landlord borrows money to purchase the property and pledges the rent to be received from the tenant as security.
Credit Tenant Lease financing is based on the credit quality of the tenant and lease structure in order to establish the cost and terms of borrowing. Credit tenant lease financing can often provide higher leverage and lower debt service coverage ratios compared to traditional mortgages. Also known as CTL Financing.
Unlike a traditional real estate loan, which is sized based on the property’s value, a CTL is sized based on the tenant’s credit and lease terms. In other words, financing is based on the creditworthiness of the CTL rather than the borrower. These loans typically offer low-interest rates, LTVs up to 100%, and debt service coverage ratio (DSCR) as low as 1.0.
A CTL is purely for commercial real estate financing. It cannot be taken out on a residential property.
Credit tenants tend to lease for long periods, which means about 15-25 years and more. These tenants provide many advantages to landlords. There’s the ability for the landlord to finance a property based on the CTL’s credit. The lease is long-term, and the tenant will often attract other businesses.
There are different types of CTLs. A triple net lease (NNN) is the most common. Double net leases (NN) are also used. A NN requires the landlord to pay for more of the property expenses. The least common in the CTL space is the gross lease.
A credit tenant is usually a nationally well-known tenant with an excellent credit rating and low default rates. These are tenants such as Walgreens, CVS, 7-Eleven, Bed, Bath & Beyond, and Dollar Tree Stores.
