Tenant Credit Lease (CTL) financing is a highly capital efficient solution for the acquisition and refinancing of single tenant, net rentable (NNN, NN or bondable) real estate to an investment grade tenant.

Because CTL bankers place no loan-to-value (100% LTV) restrictions, CTL offers the highest loan balances in the commercial real estate finance industry, making CTL perfect for buyers looking to finance your purchases with long-term, high leverage, fixed rate, fully amortizing, non-recourse commercial mortgage loans. Similarly, CTL is the best method for raising capital from existing assets or refinancing old, high-interest mortgages as they come due.

But while CTL has proven its worth in the realm of buying and refinancing, many investors building individual buildings or developing large-scale projects don’t realize that CTL loans are also available to finance assets that are being built from zero. As long as there is a long-term net executed lease and the lessee is creditworthy, CTL is a viable option.

Method 1; Standby Letter of Credit

Once a lease is signed, a CTL banker can convert it into cash. Developers who wish to use CTL to finance construction can do so using a financial instrument known as a standby letter of credit.

First, CTL’s banker originates, underwrites, and fully finances a fixed-rate, self-liquidizing commercial mortgage loan with terms to match the lease. The loan amount can be enough to cover construction or up to the full value (leasing fee assessment) of the entire completed project.

Funds are deposited in a financially sound commercial bank (rated A1 or higher) (preferably one with offices close to the project) and placed in certificates of deposit (CDs) with staggered maturities covering the estimated construction period. The developer is credited with all interest earned by the CDs.

The bank and the borrower, with the consent of the CTL Trustee, then execute a standby letter of credit. This instrument protects the interests of all parties and will remain in effect until the tenant begins to occupy the building and pay rent. The bank, for a small fee, administers the loan during construction, making distributions to the developer on a predetermined drawing schedule. The builder makes interest-only payments on the loan while the project is being built. Interest payments can be made using the loan proceeds on deposit and are offset to some extent by the interest that the CDs earn.

When the building is complete and the tenant moves out, the standby letter of credit dissolves and the loan begins to repay. Any remaining loan proceeds are turned over to the developer and loan servicing is transferred to the Trustee, who will collect the rent, pay the mortgage, and distribute any positive cash flows to the borrower.

method 2; advance commitment

Future engagements should not be confused with letters of intent (LOI) or term sheets; Term commitments are formal loan documents that are binding on all parties. Unlike a term sheet or LOI, a time commitment must be met; If a builder delivers the building according to specifications within the allotted time, the lender will finance and close.

Construction and development loans were the first type of financing to fall when the credit crunch hit and will be the last type of loan to recover. There are many things that can go wrong with a construction loan and today the economy can change dramatically in the 9 to 36 months it takes to build a quality building. These facts put development loans in the high risk category and bankers have steered clear of them for the last 4 years.

The key to getting a construction loan is to remove as much risk as possible from the construction lender; and a term commitment from a CTL banker is the perfect way to do it.

Banks don’t give credit to LOIs because they don’t have teeth. Any lender can withdraw from any LOI at any time. Experienced (Developers who have taken an LOI to a construction lender know this to be true.) However, a forward commitment is a formal and legally binding permanent loan commitment that will close when the building is completed. Banks recognize that term commitments significantly mitigate the risk to which their capital is exposed. Most banks will have no problem financing construction when they know permanent financing already exists; after all they have to lose.

Before a CTL banker issues a future commitment, they will fully underwrite the project and verify the terms of the net lease. Again, the tenant must be investment grade and the building must be free-standing and single-tenant. The lease must be triple net (NNN), double net (NN) or bondable and must have a minimum term of 10 years. The CTL lender and the borrower will go through the entire CTL process until closing. The closing date will be based on the estimated construction time and must correspond to the beginning of the rental.

With a term commitment in hand, a developer will have little trouble securing construction from a bank or insurance company. They provide construction capital and the pre-negotiated CTL loan pays off the bank loan and provides the long-term, fixed-rate debt necessary to make the project viable.

Now, developers and builders have two ways to use CTL financing to get money for construction, as well as permanent financing. They can take the funds provided by CTL Finance, deposit them in a bank, and finance the construction through a standby letter of credit. Or, if they prefer, they can have the CTL banker issue a term commitment and use that document as leverage to obtain a traditional construction loan.

Whether to buy, refinance or build, CTL loans continue to be an excellent capital solution for single-tenant net lease investors and developers.