Owners of single tenant buildings that are triple net (NNN) leased to credit worthy tenants are discovering that credit tenant lease financing is often a better alternative than selling when they find themselves in need of cash.
Selling a building is not an inexpensive endeavor; brokers charge anywhere between 4 and 6% commission, and there are numerous legal fees and other miscellaneous costs as-well.
Besides the direct expenses associated with selling there are also tax considerations. A transfer of ownership is a taxable event; any gain realized will be highly coveted by Uncle Sam. Sale proceeds are subject to a heavy capital gains tax burden or complex and time sensitive 1031 exchange regulations.
Further, selling a building is a time consuming, elaborate affair involving buyers, who expect sellers to give properties away, brokers who’s commission structure creates inherent conflicts of interest, four hundred dollar an hour lawyers who demand to be paid whether or not a deal is profitable, and a variety of third parties and processors who, frankly, don’t care if a transaction happens or not. In-short selling real estate is a big hassle.
Refinancing an asset is not without challenges either, but when NNN investors use credit tenant lease financing methods they often find it to be a highly proficient and effective method of monetizing existing equity.
From a property owners perspective CTL is a streamlined and simple way to borrow against a single tenant building. Put simply, if the lease and the tenant pass muster a landlord can pull 100% of the equity out of a building in about a-month-and-a-half.
CTL is a highly specialized form of real estate investment banking. The bankers originate a commercial real estate mortgage loan, create a private placement bond that is secured by the income that a NNN lease produces, sell the bond to fixed income investors and hand the proceeds over to the borrower. It all works seamlessly and efficiently if a loan qualifies.
In order for a deal to be eligible for CTL lending the real estate must be “stand alone”, that-is it must be a separate parcel for tax purposes, and it has to be NNN leased to a single “investment grade” tenant. Most bankers consider anything above BBB- by Standard and Poors and/or Ba1 by Moody’s to be investment grade. If those criteria are met there is usually little problem securing a CTL loan.
CTL lending is high leverage lending, in-fact CTL bankers place no 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 equity without relinquishing ownership of the real estate. Borrowers retain the rights to all the rent collected over and above the mortgage payment. That means that any annual bump-ups or renewals belong to the landlord not the bank or the new owner.
Another attractive feature of CTL is the fact that it is fixed rate self amortizing financing. Borrowers will not feel the effects of rising interest rates nor will they ever have to worry about coming up with large balloon payments late in the lifecycle of a building. CTL loans are generally coterminous with the length of the lease; when the lease is up the loan is already paid off and the property is free and clear. If the tenant renews all the rent payments flow right to the bottom line.
NNN investors find CTL loans are relatively hassle free, they are non-recourse loans, the lease, not the owners wallet, backs the mortgage. In addition they are fast and easy to get if a deal qualifies. A CTL loan can be funded and closed from start to finish in as-little-as 45 days (60 days is typical). A standard commercial mortgage loan from a bank or insurance company can take 90-180 days or to more to finalize, and selling an asset can involve months and months of marketing and negotiation before it finally closes.
When compared to attempting to sell a NNN leased, single tenant building, CTL can be highly favorable and is often the better choice. CTL offers the largest loan balances in the commercial mortgage industry (to 100% LTV), and unlike sales proceeds, there is no tax bill due. It can be accomplished very quickly and there is no back and forth horse trading to done. Many owners, developers and sponsors find CTL to be the superior method of realizing the equity they have locked up in single tenant real estate. In-any-case, CTL is well worth considering as an alternative to selling.