Credit Lease (CTL) or Conventional (Bank) Loan – Which is best for my NNN deal?
Many quality, single-tenant net lease properties qualify for both credit line lease financing (CTL) and conventional commercial mortgage lending. Net lease property investors should consider the pros and cons of each before deciding which type of loan to commit to.
CTL lending is typically best for a long-term income investor who wants consistent, highly leveraged, fixed rate, fully amortized financing and desires speed and certainty of execution. Bank lending has a lower initial (but not total) cost and can offer a greater variety of terms. Banks are best for investors who need options, don’t need maximum leverage (have a large down payment available) and who aren’t sure if they will hold a property for the long term.
CTL lending combines aspects of commercial mortgage lending with specialized investment banking to close deals. CTL Banker issues and sells corporate private placement bonds that are secured by real estate leases. The proceeds from the bond sale are used to finance a commercial mortgage loan for the borrower. The loan is administered by a third-party trustee throughout the term of the transaction.
Traditional commercial mortgages are standard loans secured by liens against the real estate, the income generated by the property, and the borrower’s credit. Banking institutions make the loan and finance the transaction either by selling the loan to an investor (private or public) or by borrowing their own funds and holding the loan in their portfolio.
The ongoing credit crunch has forced banks to tighten their lending criteria. It is very unlikely that a commercial bank would offer more than 75% loan to value (LTV) on any deal today. Banks have no incentive to take unnecessary risk; they can borrow money from the Federal Reserve (Federal Reserve Bank) at 0% interest and buy 10-year Treasuries at 2%, earning 2 risk-free points. They will transfer highly leveraged loans and only lend when they have large amounts of secured capital.
CTL lenders will lend up to 100% LTV (lease fee valuation) on a non-recourse basis. They deal with borrowing the full present cash value of a lease (against guaranteed future income). CTL bankers are without a doubt the highest loan offers in the commercial real estate financing industry.
Speed and security of execution
CTL loans can be closed in about 1/3 the time it takes to close a conventional commercial mortgage. CTL deals have been known to close from start to finish in less than 45 days (unheard of in the merchant banking world), but typically take 60.
Bank loans take at least 60 days, sometimes 180 or more. Also, because CTL deals are either eligible or not, the banker can give the borrower a solid yes or no very quickly. There are thousands of ways a bank loan can fail, but once a CTL banker commits to a deal and the borrower signs up, there is almost 100% certainty of performance.
CTL loans are all non-recourse loans secured by the income generated by the lease.
Bank loans are usually, though not always, standard, credit-driven, full recourse loans with a lien against the borrower as well as the real estate.
A CTL loan will have higher upfront costs due to the investment banking aspect of the deal and the fact that a third party trustee must be involved. However, over the life of a property, a CTL is usually cheaper because you never have to refinance. At the end of a CTL loan, the borrower owns the property free and clear.
Bank loans must be recapitalized or repaid at the end of each term, usually 3, 5, 7 or 10 years. The need to refinance so often results in a higher total cost of capital.
CTL lending is slightly less flexible than standard bank lending. Bonds sold by CTL bankers are regulated by the securities and insurance industries. CTL lenders must adhere to very strict criteria and are not allowed to deviate from the standards. The transaction qualifies for CTL or not; no freedom of action.
Banks usually have many lending platforms; they are able to tailor a loan to a specific situation or a specific property.
Banks may offer self-amortizing loans, but typically issue mortgages with maturities of 3, 5, 7 or 10 years, amortized over 10-25 years with balloon payments due at the end of each term. Banks may also offer fixed or adjustable interest rates.
All CTL loans are fully amortized, long-term, fixed-rate loans with lease-matching terms.
Banks offer a wider variety of loan products and can lend against more types of properties and tenants. Bank lending also tends to be cheaper in the short term.
On the other hand, banks are reluctant to offer high LTV loans and usually require the borrower to guarantee the loan. Additionally, bank loans are notorious for falling through and failing to close for a variety of reasons (or no reason at all).
CTL loans are strict in their qualification standards, but they close with almost 100% certainty. They close faster and are cheaper over the life of the deal. CTL bankers place no limits on LTV or LTC (loan to cost) and are non-recourse loans. It should also be noted that CTL loans are administered by a third-party custodian throughout the life of the loan. The trustee will collect the rent, pay the mortgage and distribute the income to the borrower each month.
CTL loans are best for buy-and-hold investors who want to lock in today’s low interest rate for the long term. They are also suitable for investors who need highly leveraged financing or who want to close as soon as possible.
Bank loans are best for deal investors who need some flexibility in the underwriting process. Bank loans will cost less up front and more deals will qualify. Banks offer more credit options to qualified borrowers.
Single tenant, net lease real estate investors who understand their options will be well prepared to make the best financing decisions for themselves and their business.
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