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.

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.

CTL loans have some of the lowest default rates in the commercial finance industry, and lenders are more likely to offer a borrower generous terms, including lower than average interest rates and even LTVs of up to 100%.

Credit tenant leases typically have a variety of benefits, including:

• LTV allowances, often 95-100%
• DSCR allowances, often 1.00-1.05x
• 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

The risks associated with a Credit Tenant Lease (CTL) in commercial real estate include:

• 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.
• Spreads may creep up on borrowers unexpectedly.
• Certain lenders may use tricks, such as quoting a slightly different index or accrual period than the one that will actually be used, giving borrowers the impression that their interest rate will end up being lower than it really is.
• 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.
• Credit rating agencies have slightly different (and somewhat stricter) requirements for CTL loans than traditional CMBS or other types of CRE financing.
• Borrowers whose tenants have less than a BBB minus credit score typically have difficulty obtaining CTL financing.

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. Source

When evaluating a Credit Tenant Lease (CTL) in commercial real estate, there are several key considerations to keep in mind. First, tenants must usually have a recognized corporate credit score of between AAA and BBB- for a borrower to obtain this type of financing. Second, 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. Third, spreads may also creep up on borrowers unexpectedly; 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 used. Fourth, 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. Finally, 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.

Sources:

• apartment.loans/posts/what-is-a-credit-tenant-lease-ctl
• www.commercialrealestate.loans/commercial-real-estate-glossary/ctl-credit-tenant-lease

The tax implications of a Credit Tenant Lease (CTL) in commercial real estate depend on the type of lease and the structure of the loan. Generally, CTLs are structured as triple net (NNN) leases, in which the tenant is responsible for most or all repair and maintenance (R&M) costs. In this case, the landlord is not responsible for any of the R&M costs, and the tenant is responsible for all of the taxes associated with the property. However, CTLs can also be structured as double net (NN) leases, in which the landlord is responsible for some of the R&M costs, and the tenant is responsible for the remaining taxes associated with the property.

In either case, the landlord is typically responsible for the taxes associated with the loan itself, such as interest payments and other loan-related costs. Additionally, the landlord may be responsible for any capital gains taxes associated with the sale of the property.

It is important to consult with a tax professional to determine the exact tax implications of a CTL in commercial real estate.