What is a Credit Tenant Lease in Commercial Real Estate?
A credit tenant lease (CTL) is a form of commercial real estate financing in which a loan is given for a property with a long-term lease (usually 10+ years), and is typically held by a nationally-recognized tenant with a high credit rating. Due to the additional security of having a high-credit tenant, lenders are often significantly more flexible when it comes to loan terms for CTLs.
CTLs are typically negotiated as triple net (NNN) leases, in which a tenant is responsible for most or all repair and maintenance (R&M) costs. However, credit tenant leases are sometimes arranged as double net (NN) leases, which can increase cash on cash returns for a landlord, but will increase their overall risk, especially as a property grows older.
Benefits of Credit Tenant Leases
Credit tenant leases typically have a variety of benefits, including:
Higher LTV allowances, often 95-100%
Higher DSCR allowances, often 1.00-1.05
Consistent income and less risk for investors
Less management cost than multi-tenant properties
CTLs are typically non-recourse loans
Credit Tenant Leases and Sale Leaseback
Credit tenant leases are often engaged as part of a sale leaseback transaction, in which an investor purchases a commercial property and leases it back to the previous owner at a set rate for an extended period of time (often 20-30 years). Whether a CTL involves a sale leaseback transaction or just a regular lease, the tenant often has the ability to purchase the property at a certain point; either for a fixed amount or for the property's fair market value.