Don’t Sell It, CTL – Getting A Credit Tenant Lease Loan May Be Better Than Selling Your NNN Asset

Single-tenant building owners that are triple net (NNN) leased to credit worthy tenants are finding that tenant lease financing on credit is often a better alternative than selling when in need of cash.

Selling a building is not an economic endeavor; brokers charge 4-6% commission, and there are numerous legal fees and other miscellaneous costs as well.

In addition to the direct expenses associated with the sale, there are also tax considerations. A transfer of ownership is a taxable event; any winnings made will be highly coveted by Uncle Sam. The proceeds from the sale are subject to a heavy capital gains tax burden or complex and time-sensitive 1031 exchange regulations.

Furthermore, selling a building is a complicated and time-consuming affair involving buyers, who expect sellers to give away properties, brokers whose commission structure creates inherent conflicts of interest, four-hundred-dollar-an-hour attorneys demanding to be paid. , whether or not a profitable deal is made, and a variety of third parties and processors who, frankly, don’t care if a transaction occurs or not. Selling real estate short is a huge hassle.

Refinancing an asset is also not without its challenges, but when NNN investors use credit tenant lease financing methods, they often find it to be a highly competent and effective method of monetizing existing equity.

From a homeowner’s perspective, CTL is a streamlined and easy way to apply for loans against a single-tenant building. Simply put, if the lease and the tenant approve the meeting, the landlord can withdraw 100% of a building’s equity in about a month and a half.

CTL is a highly specialized form of real estate investment banking. Bankers originate a commercial real estate mortgage loan, create a private placement bond that is secured by the proceeds of an NNN lease, sell the bond to fixed-income investors, and deliver the proceeds to the borrower. Everything works seamlessly and efficiently if a loan qualifies.

For a deal to be eligible for CTL loans, the property must be “freestanding”, that is, it must be a separate parcel for tax purposes, and it must be leased NNN to a single “investment grade” tenant. Most bankers consider anything above Standard and Poors’ BBB- and / or Moody’s Ba1 to be investment grade. If those criteria are met, there is generally little trouble getting a CTL loan.

CTL loans are high-leverage loans; in fact, CTL bankers do not impose restrictions on loan to value (LTV) and have extremely low debt service coverage ratio (DSCR) standards; generally 1.01X – 1.00X. This means that owners can access up to 100% of their share capital without giving up ownership of the real estate property. Borrowers retain rights to all rent collected above the mortgage payment. That means any annual increase or renewal belongs to the owner, not the bank or the new owner.

Another attractive feature of CTL is the fact that it is a fixed-rate, self-amortizing financing. Borrowers will never feel the effects of rising interest rates, nor will they ever have to worry about making large balloon payments at the end of a building’s life cycle. CTL loans generally coincide with the length of the lease; When the lease ends, the loan is already paid off and the property is free and clean. If the tenant renews, all rental payments flow directly to the bottom line.

NNN investors find CTL loans relatively hassle free, they are non-recourse loans, the lease, not the owner’s wallet, backs the mortgage. Plus, they’re quick and easy to come by if you qualify for an offer. A CTL loan can be financed and closed from start to finish in as little as 45 days (typical is 60 days). A standard commercial mortgage loan from a bank or insurance company can take 90-180 days or more to finalize, and the sale of an asset can take months and months of marketing and negotiation before it finally closes.

Compared to trying to sell a building leased by NNN to a single tenant, CTL can be very favorable and is often the best option. CTL offers the largest loan balances in the commercial mortgage industry (up to 100% LTV) and, unlike sales revenue, no tax bills are owed. It can be accomplished very quickly and there is no need to do back and forth horse exchanges. CTL is considered by many homeowners, developers, and backers to be the superior method of obtaining their locked-in equity in single-tenant real estate. In any case, CTL is worth considering as an alternative to selling.