[ad_1]
Credit Tenant Lease (CTL) financing is a very capital efficient solution for the acquisition and refinancing of single tenant, real estate that is Net Lease (NNN, NN or Bondable) to an investment grade tenant.
Because CTL bankers do not impose loan-to-value (100% LTV) restrictions, CTL offers the highest loan balances in the commercial real estate finance industry, making CTL perfect for buyers looking for long-term, high Want to finance your purchase with. Fully amortized commercial mortgage loan on a leveraged, fixed rate, non-recourse basis. Similarly, CTLs are the best way to extract equity from existing properties or refinance old, high-interest mortgages as they come due.
But, while CTL has proven itself in the buyout and refinance sector, many investors who build single buildings or develop large scale projects don’t realize that CTL loans are built from the ground up. Financing of properties are also available. As long as an executed, long-term net lease is in place, and the tenant is creditworthy, CTL is a viable option.
Method 1; standby letter of credit
Once the lease is signed, the CTL banker can convert it into cash. Developers who wish to use CTL to fund creation can do so by using a financial instrument known as an additional letter of credit.
First, CTL Banker originates, underwrites and fully funds a fixed-rate, self-amortizing commercial mortgage loan, which is similar with a lease. The loan amount can be sufficient to cover construction only or up to the full value (lease fee valuation) of the entire finished project.
The funds are deposited in a financially sound (rated A1 or higher) commercial bank (one with offices near the project) and placed in Certificates of Deposit (CDs) with staggered maturities covering the estimated construction period. All interest earned from the CD is credited to the developer.
Thereafter the bank, and the borrower, with the consent of the CTL trustee, executes a standby letter of credit. This instrument protects the interests of all the parties and will remain in place till the tenant starts occupying the building and paying rent. The bank, for a small fee, manages the loan during construction, making deliveries to the developer on a pre-determined draw schedule. The builder pays only the interest on the loan during the construction of the project. Interest payments can be made using the accumulated loan proceeds and are offset to some extent by the interest being earned by the CD.
When the building is completed and the tenant moves in the additional letter of credit dissolves and the loan amortization begins. Any remaining loan proceeds are released to the developer and administration of the loan is transferred to a trustee who will collect rent, pay off the mortgage, and distribute positive cash flow to the borrower.
Method 2; forward commitment
Forward commitments should not be confused with letters of intent (LOIs) or term sheets; Forward commitments are formal loan documents that are binding on all parties. A forward commitment, unlike a term sheet or LOI, must be honored; If a builder delivers the building as per the specifications within the allotted time, the lender will fund and close.
Construction and development lending was the first type of financing used when the credit crunch hit and it will be the last type of lending to recover. There are so many things that can go wrong with a construction loan and nowadays getting a quality building constructed in 9-36 months can make a huge difference in the economy. These facts put development loans in high risk category and bankers have shied away from them since last 4 years.
The key to getting a construction loan is to take as much risk from the construction lender as possible; And Forward Commitment from CTL Banker is the right way to do it.
Banks do not give any credence to LOIs as they do not have teeth. Any Lender may withdraw from any LOI at any time. Experienced (Developers who have taken an LOI to a construction lender know this to be true.) A forward commitment, however, is a formal and legally binding permanent loan commitment, to be closed when the building is finished. Banks believe that forward commitments substantially reduce the risk exposure to their capital. Most banks will have no problem financing the construction when they know that permanent financing is already in place; After all, what do they have to lose?
They will fully underwrite the project and verify the terms of the net lease before the CTL banker issues the forward commitment. Again, the tenant must be investment grade and the building must be single and single tenant. The lease should be triple net (NNN), double net (NN) or bondable and should be at least 10 years long. The CTL lender and borrower will go through the entire CTL process till closing. Completion date will be based on estimated construction time and must be commensurate with rent commencement.
With forward commitments in-hand, a developer would have little problem in securing construction from a bank or an insurance company. They provide construction capital and pre-negotiated CTL loan bank loans and provide long-term, fixed-rate loans needed to make the project viable.
Now developers and builders have two ways to use CTL finance to get construction money as well as sustainable financing. They can deposit the money provided by CTL Finance into a bank, and finance the construction through an additional letter of credit. Or, if they prefer, they can issue a forward commitment from the CTL banker and use that document as leverage to obtain a conventional construction loan.
Whether buying, refinancing or building, CTL Lending is an excellent capital solution for single tenant, net lease investors and developers.
[ad_2]
