Credit Tenant Lease (CTL) or single tenant investment grade lease financing is a $3 billion annual component of today’s commercial real estate financing market. Traditional real estate loans are underwritten primarily based upon cashflow and an appraisal that considers many factors including cost, recent similar property sales and income generation. CTL financing primarily emphasizes the credit quality of the tenant and lease structure/cashflow in order to establish loan proceeds and the cost of borrowing.
CTL financing is a valuable source of capital and an effective use of the debt capital markets for acquisition financing, permanent financing, equity withdrawal, additional working capital and refinancing term maturities.
Qualified Property Types
- Single tenant retail stores
- Bank branches
- Corporate headquarters facilities
- Office buildings
- Commercial buildings
- Warehouse and distribution centers
- Manufacturing facilities
- R&D / laboratory facilities
- Health care facilities
- University facilities
- State and municipal facilities
Credit Characteristics of Tenants
Credit Tenant Lease transactions focus more on the credit of the tenant and the lease structure than on the type, quality, and location of the real estate. In addition to its strong credit analysis capabilities, Advoca Capital has the expertise and experience to evaluate real estate risk and successfully structure transactions involving investment and grade rated and non-rated tenants.
Benefits of Credit Tenant Leasing Financing
CTL financing generally has several advantages over traditional real estate financing including:
- Maximum loan proceeds – in excess of 100% for qualified bond-type leases and up to 100% financing for triple net leases
- Tighter pricing compared to a traditional mortgage loan
- Debt service coverage ratio’s as low as 1.003 times
- Long term fixed rate loan commitments for up to 30 years
- Non-Recourse Financing
- Transaction costs are lowered by combining the construction loan financing with thepermanent loan financing
- Forward rate lock commitments are available up to 24 months
Advoca Capital Underwriting Expertise
Advoca Capital, LLC has worked extensively with both public and private companies, and across the spectrum of investment grade and non-rated tenants. Advoca Capital, LLC’s experience in accessing capital allows the Borrower to effectively execute both single property and multiple property transactions.
Underwriting Expenses and Reserves
With the exception of a minimal annual trustee servicer fee, no deductions are taken from the lease payments to arrive at cash flow available for debt service. In the event the landlord has obligations under the lease, a management fee of .5 to 1.0% (depending on the size of the loan) is deducted along with a reserve to cover landlord obligations. If rent abates following a casualty and the tenant is not obligated to carry rent loss insurance, the landlord is required to purchase 12 month’s rent loss coverage and the premium is deducted in arriving at net cash flow.
Lease Types and Characteristics
Bond Types Leases
- Debt service coverage as low as 1.0 times
- Loan-to-value ratios in excess of 100%
- All property types, uses and locations
- Borrower responsible for Phase 1 environmental from pre-approved consultants
- Direct corporate obligations funded similarly
Double Net Leases
- Debt service coverage as low as 1.05 times
- Loan-to-value ratios typically of 100% or less
- Retail, industrial or office property types in any location considered
- Borrower responsible for MAI appraisal, Phase 1 and engineering reports from pre-approved consultants
- Escrow for landlord maintenance and any lease responsibilities not covered by tenant
- Specialty insurance to cover casualty and condemnation risk is generally not required.
Construction Loans converting to Permanent Loans
- Build to suit properties pre-leased to credit tenants
- 100% financing available
- Greater than 100% financing available based on present value of rent increases
- Pre-development funds available for high quality tenant leases on Absolute Leases
- Construction loan rolling into permanent loan
- All property types, uses and locations
- Lease must be bond or absolute net lease
- Preferred lease terms of 10, 15, and 20 years
- Transaction typically requires a bank Letter-of-Credit to be posted to cover the construction period risks
The Advoca Capital Taxable Note Program is available to corporations, partnerships and individuals and provides highly attractive financing through access to the capital markets. All notes are issued by the borrower and placed directly by Advoca Securities. Taxable notes have traditionally been a lower cost of financing compared to conventional financing.
The Taxable Note structure can be utilized for any borrowing over $2,000,000 and for any type of borrower. The key is securing the letter of credit (LOC) that enhances the Note issue. The principals of Advoca Capital have structured over $5 billion of notes and have worked with approximately 20 LOC providers. Whether you are building a new facility or remodeling an existing facility, acquiring companies, purchasing equipment or refinancing existing debt, Advoca Capital can help structure and secure the financing.
Advoca Capital through Advoca Securities provides Senior Debt Private Placement Financing for its clients and other originators to fund capital expenditures, acquisitions, share repurchases, and similar demands. Through its strong alliances with life companies, pension funds and other qualified investors Advoca Capital manages the direct sale of debt or other securities. These securities are exempt from registration with the SEC and issuers and are not required to be rated.
Benefits of Senior Debt Private Placements
- Accommodates smaller issue size than the public debt markets
- Substantially longer, more flexible maturities than bank term debt
- Flexible debt covenant structures
- Information disclosure is highly controlled for closely held companies
- The funding process is lees complex and much faster than issuing public debt
- Debt ratings are not required
- A private placement enables the issuer to raise long-term debt when the public bond markets are experiencing disruption
Under the Taxable Lease Revenue Bond Financing Structure the University leases the project for the life of the financing.
- The owner of the project is a developer and the ownership entity is a single-purpose bankruptcy remote entity
- The Master Lease is structured as a triple net lease or as an operating deficit guaranty
- The Master Lease is not subject to annual appropriations risk
- Lease payments are essentially subordinated to the university’s general receipts bonds outstanding
- The Master Lease is date certain
- The Lease is classified as a Capital Operating Lease
- Under the Master Lease, the University agrees to operate the project
- The lease payments are structured to be sufficient to cover the debt service on the bonds plus any operating costs not paid by the University
- Typically bond proceeds are funded into a construction fund
- The credit rating on the bonds issued to fund the transaction generally would be one level below that of the University, resulting in a slightly higher cost of borrowing then typical University direct debt financing
Equipment Leasing
The primary benefit of leasing business equipment is the minimal amount of cash it takes to fund the asset. A lease essentially converts a large cash sale price into an affordable monthly payment. You have the right to use the equipment in exchange for regular payments made over a contracted period of time. Unlike bank loans, which typically require a down payment, a lease generally needs only one advance monthly lease payment. Leasing companies will finance one hundred percent of the asset, whereas a bank typically will not. Keeping cash available in your business for other key investments is an important benefit to equipment leasing. It also offers tax advantages, depending on how the lease was structured.
Monthly Payments
There are alternatives to the standard monthly fixed payment associated with term debt financing. Leasing companies will offer flexible lease payment schedules, such as a skip lease, which allows you to forgo making payments during your business’ traditionally slow period when cashflow is tight. The other alternative is called a step-up lease, designed to minimize lease payments based upon limited initial business cashflow.
Lease Terms
Lease terms range from two to five years for technology-related and up to thirty years for longer life assets such as rail cars and aircraft. These leases are generally non-cancellable. However, termination options do exist and are referred to as an “Early Termination Option”, a written clause in the lease contract that allows for termination at a predetermined price.
Buyout Options
Most leasing companies offer a fixed buyout clause which permits your company to purchase the equipment for a prearranged amount during the lease term. This option typically is available at the end of your lease term and detailed and agreed to at the original execution of the lease. Typically, at the end of the lease there are options to purchase the equipment or extend the lease at fair market value. The most common buyout options include the “$1.00 buyout”, a predetermined buyout amount stated in the contract, and a “fair market value” purchase option exercisable at the end of the lease.
