The details of credit tenant lease financing

Q. I have been approached by a developer who says the General Services Administration is interested in a build-to-suit building for a U.S. agency on a parcel of land that I own. The developer also claims that we can leverage the property using the GSA lease, financing all of project costs plus the land. Can this be accomplished?

A. Yes, and in some cases, it is possible to finance a loan amount in excess of the project costs and take out a profit from the financing proceeds. This type of commercial mortgage financing is called credit tenant lease, or CTL, and is usually available to companies that maintain a credit rating of BBB or better from a national credit rating agency like Fitch or Moody’s. A higher credit rating usually translates into a lower interest cost for the company’s borrowing needs. The credit rating is a risk rating that the obligation of the company, whether it is debt or a lease, will likely be met.

The U.S. government has always maintained an impeccable credit history, with generally stabilized governance and a worldwide acknowledgement of financial stability. Countries and investors worldwide seek the safety and stability of investing in U.S. Treasury bonds, the payments for which are guaranteed by the government. U.S. government leases usually qualify for CTL financing, since they are looked upon equally as a U.S. government debt obligation.

A CTL is viewed by both the equity and debt sides of the transaction as a very safe investment with minimal cash flow risk. This perspective provides an enhanced value for the CTL that cannot be matched by other real estate collateral types, with similar net income.

In consideration of the minimal cash flow risk, underwriting for CTL financing is much more aggressive than other income-producing real estate collateral types and usually requires a specialized lender. The CTL lender will apply a lower debt service coverage ratio – DSCR — to the net cash flow from the CTL, than it would to other non-credit-rated lease obligations. A DSCR as low as 1.03 is often achievable, as compared to 1.20 or greater for other collateral types.

In addition, a CTL lender will often average the rent received throughout the lease term, thereby taking advantage of any rent adjustments to increase the financing leverage. The loan-to-value and loan-to-cost restrictions are also relaxed, typically allowing a loan to be in excess of 100 percent of cost with a loan to value restriction as high as 95 percent.

Lastly, the interest rate charged by a CTL lender is one of the most competitive offered. The combination of these underwriting circumstances yields a property owner with a CTL, an extremely high leverage opportunity. Appraisers with experience in CTL lease valuation are also necessary to maximize leverage, as the leasehold interest of a CTL commands a higher value than other real estate collateral types, with matching net income.

There are numerous issues with a CTL that must be negotiated in order to achieve the maximum financial benefit for the property owner. Critical to maximizing loan proceeds are the length of the base lease term and the determination of the net cash flow. Most maximum leverage, CTL financing requires a self-amortizing loan term that is coterminous with the base lease term.

The net cash flow must be well documented and very certain to be generated after any property operating expenses. This is particularly critical for a GSA lease, since the GSA usually requires most operating expenses to be paid by the landlord. A professional with experience in CTL financing and negotiations should be brought onto a property owners team early on in the process to assure the maximum benefit from the opportunity.

David B. Eaton, president of Eaton Partners, Manchester, manages the firm’s Commercial Mortgage Group. Questions can be submitted to him at

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