Bonds Issued By Government Entities To Finance Real Estate Projects A Credit Tenant Lease (CTL) or Conventional (Bank) Loan – Which Is Best for My NNN Deal?

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A Credit Tenant Lease (CTL) or Conventional (Bank) Loan – Which Is Best for My NNN Deal?

Many good quality net leased, single tenant properties qualify for both credit tenant lease (CTL) financing and conventional commercial mortgage loans. Net lease 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, highly leveraged, fixed rate, fully amortized financing and who wants speed and security of execution. Bank loans have a lower initial (but not overall) cost and can offer a greater variety of terms and conditions. Banks are best for investors who need options, don’t need maximum leverage (have a large down payment available) and aren’t sure they’ll hold a property for the 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 real estate lease. The proceeds of the bond sale are used to finance a commercial mortgage loan for the borrower. The loan is administered by a third-party trustee throughout the life of the contract.

Traditional commercial mortgages are standard loans secured by mortgage liens against the property, the income produced by the property and the borrower’s credit. Banks originate a loan and finance the business by selling the loan to an investor (private or government) or lending their own funds and keeping the loan in their portfolio.

leverage

The ongoing credit crunch has forced banks to tighten 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 Treasury Bonds at 2% earning 2 risk-free points. They will pass on highly leveraged loans and will only lend where they have large amounts of protective capital.

CTL lenders will lend up to 100% LTV (Lease Rate Valuation) without recourse. They are in the business of lending the full present cash value of a lease (against guaranteed future income). CTL Bankers arguably 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 a conventional commercial mortgage. CTL deals have been known to complete, from start to finish, in as little as 45 days (unheard of in the commercial banking world), but generally take 60.

Bank loans take at least 60 days, sometimes 180 or more. Also, because CTL offers either qualify or don’t, a banker can give a borrower a solid yes or no very quickly. There are a thousand ways a bank loan can fail, but once a CTL banker commits to an agreement and a borrower signs, there is almost 100% certainty of execution.

resource

CTL loans are all non-recourse loans secured by the income the lease produces.

Bank loans are often, though not always, standard, credit-driven, full-recourse loans with liens against the borrower as well as against the 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 cycle of a property, CTL is usually 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 repaid at the end of each term, usually 3, 5, 7 or 10 years. Having to refinance often results in a higher overall cost of capital.

Flexibility

CTL loans are somewhat less flexible than standard bank loans. Bonds sold by CTL bankers are regulated by the securities and insurance industries. CTL lenders must meet very strict criteria and are not allowed to deviate from the standards. A deal qualifies for CTL or not; there is no margin.

Banks generally have many lending platforms available; they are able to adapt a loan to a specific situation or to a specific property.

terms

Banks may offer auto-amortizing loans, but generally issue mortgages with maturities of 3, 5, 7 or 10 years amortized over 10-25 years with lump sum payments due at the end of each term. Banks may also offer fixed or adjustable rates.

CTL loans are long-term, fully amortized, fixed-rate loans with terms matching the lease.

In summary

Banks offer a wider variety of loan products and can make loans against more types of properties and tenants. Bank loans are also usually less expensive in the short term.

On the downside, banks are disinclined to offer high LTV loans and generally require the borrower to provide collateral for a loan. Also, bank loans are notorious for falling through and not closing for any number or reasons (or no reason at all).

CTL loans are rigid in their qualification standards, but they close with almost 100% certainty. They close faster and are less expensive over the life of a business. CTL bankers do not put restrictions on LTV or LTC (loan to cost) and are non-recourse loans. Also, keep in mind that CTL loans are administered by a third-party trustee throughout the life of a loan. The servicer 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 highly leveraged financing or are looking to close as quickly 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 deals will qualify. Banks offer more loan options to qualified borrowers.

Single tenant and net lease real estate investors who understand their options will be well equipped to make the best financing decisions for themselves and their businesses.

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