What is a Credit Tenant Lease (CTL)?
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A credit tenant lease (CTL) is a long-term lease agreement made between a property owner and a tenant with extremely good credit, typically a major corporation. Credit tenant leases are the basis for credit tenant lease (CTL) loans, which have some of the lowest default rates in the commercial finance industry. CTLs are unique in the sense that they are based mainly on the strength of the tenant, not on the strength of the borrower. Because they are a relatively safe bet as far as lenders are concerned, lenders are more likely to offer a borrower generous terms, including lower than average interest rates and even LTVs of up to 100%.
Despite their benefits, investors and borrowers should note that credit tenant lease loans are solely made for commercial properties and not for multifamily properties. Either way, qualifying can be a challenge; tenants must usually have a recognized corporate credit score of between AAA and BBB- for a borrower to obtain this type of financing.
Related Questions
What are the benefits of a Credit Tenant Lease (CTL)?
Credit tenant leases typically have a variety of benefits, including:
- LTV allowances, often 95-100%
- DSCR allowances, often 1.00-1.05x
- Long-term, fixed-rate loans (often up to 25 years or more)
- Consistent income and less risk for investors
- Less management cost than multi-tenant properties
- CTLs are typically non-recourse loans
- Replacement reserves are not typically required
What are the risks associated with a Credit Tenant Lease (CTL)?
While credit tenant lease financings do offer some incredible benefits for borrowers, they aren’t without their risks. CTL financing has a reputation for falling apart at the last minute, often due to the fact that many CTL loans are securitized and lenders may not understand agency rating requirements. In many situations spreads may also creep up on borrowers unexpectedly; Unfortunately, certain lenders are known to use certain tricks, such as quoting a slightly different index or accrual period than the one that will actually be used. This can give borrowers the impression that their interest rate will end up being lower than it really is. In addition, many lenders may require a borrower to purchase lease enhancement insurance, which could add up to 0.25% to a borrower’s annual interest rate.
To avoid these risks, borrowers who want to secure the best terms on a CTL loan may wish to seek out a dedicated credit tenant lender with significant experience in originating and closing this type of financing. In addition to reducing the chance of major risks, dedicated and experienced CTL lenders will likely be able to devote more personalized attention to borrowers. They may be significantly more flexible with the loan terms they are willing to provide.
Drawbacks of CTL financing include:
- Lenders may not understand agency rating requirements
- Spreads may creep up on borrowers unexpectedly
- Lenders may quote a slightly different index or accrual period than the one that will actually be used
- Lenders may require a borrower to purchase lease enhancement insurance
To avoid these risks, borrowers should seek out a dedicated credit tenant lender with significant experience in originating and closing this type of financing.
What are the requirements for a Credit Tenant Lease (CTL)?
The requirements for a Credit Tenant Lease (CTL) are that the tenant must have a recognized corporate credit score of between AAA and BBB- for a borrower to obtain this type of financing. In addition, credit tenant loans are generally non-recourse and do not require replacement reserves. Credit rating agencies have slightly different (and somewhat stricter) requirements for CTL loans than traditional CMBS or other types of CRE financing. It is also important to note that CTL financing is only available for commercial properties and not for multifamily properties.
What are the advantages of a Credit Tenant Lease (CTL) over traditional financing?
The advantages of a Credit Tenant Lease (CTL) over traditional financing include:
- Higher LTV allowances, often 95-100%
- Higher DSCR allowances, often 1.00-1.05x
- Long-term, fixed-rate loans (often up to 25 years or more)
- Consistent income and less risk for investors
- Less management cost than multi-tenant properties
- CTLs are typically non-recourse loans
- Replacement reserves are not typically required
Source: www.commercialrealestate.loans/commercial-real-estate-glossary/ctl-credit-tenant-lease
What are the differences between a Credit Tenant Lease (CTL) and a traditional loan?
The main difference between a Credit Tenant Lease (CTL) and a traditional loan is that CTL financing is based mainly on the strength of the tenant, not on the strength of the borrower. This means that lenders are more likely to offer a borrower generous terms, including lower than average interest rates and even LTVs of up to 100%. In addition, these loans are generally non-recourse and do not require replacement reserves.
However, borrowers should note that credit tenant lease loans are solely made for commercial properties and not for multifamily properties. Plus, qualifying can be a challenge; tenants must usually have a recognized corporate credit score of between AAA and BBB- for a borrower to obtain this type of financing. Credit rating agencies have slightly different (and somewhat stricter) requirements for CTL loans than traditional CMBS or other types of CRE financing.
These issues are much less likely to occur when a borrower deals with a true CTL lender (vs. a CMBS/conduit lender) as CTL lenders typically have expert in-house experts more versed in traversing regulatory hurdles. In addition, these lenders base their reputation solely on CTL loans, so they may be less likely to fudge spreads and mislead borrowers than larger shops that offer many different CRE financing options.