Benefits Of Credit Tenant Lease Financing And Outlook For 2024

Credit Tenant Lease (or “CTL”) financing is a method of financing real estate in which the analysis is primarily focused on the creditworthiness of the tenant under a single tenant, long-term lease as well as the essentiality of the subject property to the tenant. Unlike a typical commercial real estate loan which is underwritten and sized based on the property value, the economics of a CTL, including financing amount and pricing, are based on the underlying lessee’s credit rating, lease structure and rental payments.

CTL financing can provide leverage of up to 100% loan-to-value, and, in general, lenders are property type agnostic. Proceeds can be used to facilitate sale / leasebacks, property acquisitions, and to provide construction-to-permanent financing for build-to-suit assets. Under more customized structures, CTLs can also be used to raise liquidity for tenants via internally owned and controlled lessor entities. CTL financings are structured as fixed-rated financings with maturities that are coterminous with the underlying lease term. CTL financing tend to be most effective for long-term (15-20+ years) leases.

CTL financing is widely used in the US-market, but less so in the European market to date, and we believe there is an opportunity for European-based tenants and real estate owners to take advantage of the CTL market, including for the following:

• Specialized Assets / Office Properties: CTL financing is an efficient method for financing office properties, particularly in the current market environment where other lenders have pulled back, as well as leases/properties with above-market rent and/or tenant improvements as the financing is based on the tenant and rental stream under the lease, not based on property type or loan-to-value.
• Purchase Options: Operationally essential assets may have longer term leases, and/or include a tenant purchase option or ownership reversion at the end of the lease term, all of which can be efficiently financed as a CTL.
• Highly Customized Structures: CTLs are highly customized loans that can be structured to achieve the objectives of the tenant, such as lower occupancy costs and/or longer lease term, including flat or nominal rent escalators.
• Non-rated Tenants: CTL can be used to finance properties leased to non-rated or privately held tenants, not just those with public bond ratings.
• Natural Currency Funding: Ability to borrow in a variety of foreign currencies.
• Construction-to-Permanent Financing: Prudential Private Capital’s CTL program provides an ability for “one-stop-shop” financing which includes both the construction and permanent financing as one loan.
• Monetizing Owned Assets: An owner/occupant can utilize a sale / leaseback, including through an internally controlled ownership structure, to extract value from its real estate holdings while retaining operational control, thus providing an ability to redeploy capital for alternative uses.

The CTL market has remained very active despite the dislocation in the broader real estate financing market, and we believe that 2024 will present continued opportunities for CTL financing.

View the full Colliers Q4 2023 Corporate Capital Outlook Report here.