Many good-quality, single-tenant, net-leasing properties qualify for both CTL (Tenant Credit Lease) financing and conventional commercial mortgage loans. Net lease property investors should consider the pros and cons of each before deciding which type of loan to commit to.
CTL loans are generally best for the long-term income investor who wants permanent, high leverage, fixed rate, fully amortizing financing, and desires speed and certainty of execution. Bank loans have a lower initial (but not overall) cost and may offer a greater variety of terms and conditions. Banks are better for investors who need options, don’t need maximum leverage (they have a large down payment available), and who aren’t sure if they’ll hold a property long-term.
The difference
CTL loans combine aspects of commercial mortgage lending with specialized investment banking to close deals. A CTL banker issues and sells private placement corporate bonds that are secured by the lease of real estate. Proceeds from the bond sales are used to finance a commercial mortgage loan for the borrower. The loan is administered by a third-party Trustee during the term of the agreement.
Traditional commercial mortgages are standard loans secured by mortgage liens on the real estate, the income from the property, and the credit of the borrower. Banking institutions originate a loan and finance the deal either by selling the loan to an investor (private or government) or by lending their own funds and keeping the loan in their portfolio.
take advantage of
The current credit crisis has forced banks to toughen their lending criteria. It is highly unlikely that a commercial bank will offer more than 75% loan-to-value (LTV) on any deal today. Banks have no incentive to take unnecessary risks; they can borrow money from the Fed (Federal Reserve Bank) at 0% percent and buy 10-year Treasuries at 2% earning 2 points without risk. They will pass on high leverage loans and will only lend when they have large amounts of backing capital.
CTL lenders will lend up to 100% LTV (Lease Rate Valuation) without recourse. They are in the business of lending the full current cash value of a lease (against guaranteed future income). CTL Bankers undoubtedly make the highest loan offers in the commercial real estate finance industry.
Speed and Certainty of Execution
CTL loans can close in about 1/3 the time it takes to close on a conventional commercial mortgage. CTL transactions are known to complete, end-to-end, in as little as 45 days (unheard of in the commercial banking world), but typically take 60.
Bank loans take at least 60 days, sometimes 180 or more. Also, because CTL offers qualify or not, a banker can give a borrower a solid yes or no very quickly. There are thousands of ways a bank loan can fail, but once a CTL banker commits to a deal and the borrower signs it, there is close to 100% certainty of execution.
Appeal
CTL loans are all non-recourse loans secured by the proceeds of the lease.
Bank loans are usually, but not always, standard, credit-driven, full recourse loans, with liens against the borrower and real estate.
cost
A CTL loan will have higher upfront costs due to the investment banking aspect of the deal and the fact that a third party trustee must be involved. However, over the life of a property, CTL tends to be less expensive because you never have to refinance. At the end of a CTL loan, the borrower owns the property free and clear.
Bank loans must be recapitalized or paid off at the end of each term, generally 3, 5, 7, or 10 years. Having to refinance so often results in a higher total cost of capital.
flexibility
CTL loans are somewhat less flexible than standard bank loans. The bonds sold by CTL bankers are regulated by the securities industries and the insurance industries. CTL lenders must meet very strict criteria and are not allowed to deviate from the standards. A deal qualifies for CTL or it doesn’t; there is no leeway.
Banks generally have many lending platforms available to them; They can tailor a loan to a particular situation or a particular property.
Terms
Banks can offer self-paying loans, but they generally issue mortgages with maturities of 3, 5, 7, or 10 years, amortized in 10 to 25 years with balloon payments at the end of each term. Banks may also offer fixed or adjustable rates.
CTL Loans are fully amortized, fixed-rate, long-term loans with terms coinciding with the lease.
In summary
Banks offer a greater variety of loan products and can lend against more types of properties and tenants. Bank loans also tend to be less expensive in the short term.
On the downside, banks are not inclined to offer high LTV loans and will generally require the borrower to guarantee a loan. Also, bank loans are notorious for failing and not closing for any number of reasons (or no reason at all).
CTL loans are rigid in their qualification standards, but close with close to 100% certainty. They close faster and are less expensive over the life of a deal. CTL Bankers place no restrictions on LTV or LTC (loan at cost) and are non-recourse loans. Also, it should be noted that CTL loans are managed by a third-party trustee for the life of a loan. The trustee will collect the rent, pay the mortgage, and distribute the proceeds to the borrower each month.
CTL loans are best for buy and hold investors who want to lock in the current low rate for the long term. They are also appropriate for investors who need high-leverage financing or who are looking to close as soon as possible.
Bank loans are best for investors with deals that need some flexibility in the underwriting process. Bank loans will cost less up front and more businesses will qualify. Banks offer more loan options to qualified borrowers.
Single tenant net lease real estate investors who understand their options will be well equipped to make the best financial decisions for themselves and their businesses.