CTL: Credit Tenant Leases in Commercial Real Estate

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. This usually includes large regional or national companies, as well as government tenants. To qualify, tenants generally must have a credit rating between AAA and BBB-minus. 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. Credit tenant lease loans are typically coterminous (i.e. ending at the same time) as the lease itself.

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

  • 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

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. 

Despite Benefits, CTL Borrowers Face Certain Risks

While credit tenant lease financing does offers 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 use. 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 and may be significantly more flexible with the loan terms they are willing to provide.


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