Using Credit Tenant Lease Financing for Build-to-Suit Construction

What is Build-to-Suit?

A build-to-suit is when a company engages a developer for the construction of a custom real estate asset intended for the sole use of the company.

Below we outline an example of how Prudential Private Capital's ("Prudential") Credit Tenant Lease (“CTL”) team structured a one-stop construction-to-permanent financing solution.

Transaction Overview

A Canadian Developer (the “Developer”) and their advisor approached Prudential to evaluate construction-to-permanent financing solutions for a build-to-suit manufacturing facility to be leased by a Fortune 100 corporation. For this large-scale transaction, it was critical for the Developer to secure financing in Canadian dollars and achieve a specific return hurdle for its equity fund LPs. After evaluating several financing alternatives, the Developer determined that our CTL offering was the most accretive option based on our tailored financing structure, lower overall cost, and beneficial amortization length.

Outcome and Benefits

Through Prudential’s custom structure the Developer achieved each of its transaction goals, including:

• Funding and pricing in natural Canadian dollars.

• Securing fixed interest rate for the duration of the 21-year financing, including the construction period.

• Contributing targeted equity investment and cash flow return.

Transaction Structure

The project was structured to provide monthly advances to a construction escrow account over the 12-month construction period. Upon construction completion and acceptance of the lease by the tenant, rent payments are used to pay debt service on the financing. Prudential’s multi-currency capabilities funded the transaction in Canadian dollars, thus eliminating all currency risk for the Developer and the Tenant. In order to achieve the Developer’s targeted return, we sized the financing to provide excess cash flow (excess cash flow after debt service) during the term of the financing (post construction).

Learn more about credit tenant lease financing here.

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Publish Date: July 20, 2023

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