Owners of single-tenant buildings that rent on triple net (NNN) to creditworthy tenants are finding that lease financing from tenants on credit is often a better alternative to selling when in need of cash.
Selling a building is not an economic effort; brokers charge 4-6% commission, and there are numerous legal fees and other miscellaneous costs as well.
In addition to the direct expenses associated with the sale, there are also tax considerations. A transfer of ownership is a taxable event; any profit made will be highly coveted by Uncle Sam. Proceeds from the sale are subject to heavy capital gains tax or complex and time-sensitive 1031 exchange regulations.
Furthermore, selling a building is an elaborate, time-consuming affair involving buyers who expect sellers to give away property, brokers whose fee structure creates inherent conflicts of interest, four-hundred-dollar-an-hour lawyers who demand that pay them whether or not a deal closes. profitable, and a variety of third parties and processors who, quite frankly, don’t care if a transaction occurs or not. In short, selling real estate is a big hassle.
Refinancing an asset is also not without its challenges, but when NNN investors use credit lease lease financing methods, they often find it to be a highly competent and effective method of monetizing existing capital.
From a landlord’s perspective, CTL is a streamlined, streamlined way to borrow against a single-tenant building. Simply put, if the lease and tenant pass the test, a landlord can take 100% equity out of a building in about a month and a half.
CTL is a highly specialized form of real estate investment banking. The bankers originate a commercial real estate mortgage loan, create a private placement bond that is secured by the proceeds produced by an NNN lease, sell the bond to fixed income investors, and deliver the proceeds to the borrower. Everything works seamlessly and efficiently if a loan qualifies.
For an agreement to be eligible for CTL loans, the real estate must be “detached”, meaning it must be a separate parcel for tax purposes, and it must be leased by NNN to a single “investment grade” tenant. Most bankers consider anything above Standard and Poor’s BBB- and/or Moody’s Ba1 to be investment grade. If those criteria are met, there are usually few problems getting a CTL loan.
CTL loans are highly leveraged loans, in fact CTL bankers place no LTV restrictions and have extremely low Debt Service Coverage Ratio (DSCR) standards; usually 1.01X – 1.00X. This means that owners can access up to 100% of their equity without relinquishing ownership of the real estate. Borrowers retain rights to all rent collected on top of the mortgage payment. That means any annual extensions or renewals belong to the landlord, not the bank or the new owner.
Another attractive feature of CTL is the fact that it is a self-liquidizing, fixed-rate financing. Borrowers won’t feel the pinch of rising interest rates or have to worry about making large balloon payments at the end of a building’s life. CTL loans generally coincide with the length of the lease; When the lease ends, the loan is paid off and the property is free and clean. If the tenant renews, all rent payments flow directly to the bottom line.
NNN investors find CTL loans to be relatively hassle free, they are non-recourse loans, the lease, not the owner’s wallet, backs the mortgage. Plus, they’re quick and easy to get if an offer qualifies. A CTL loan can be funded and closed from start to finish in as little as 45 days (60 days is typical). A standard commercial mortgage loan from a bank or insurance company can take anywhere from 90 to 180 days or more to finalize, and selling an asset can involve months and months of marketing and negotiation before it finally closes.
Compared to trying to sell a single tenant building rented by NNN, CTL can be very favorable and is often the best option. CTL offers the largest loan balances in the commercial mortgage industry (at 100% LTV) and, unlike sales revenue, there is no tax bill due. It can be accomplished very quickly and there are no back and forth horse trades to do. Many owners, developers, and sponsors find that CTL is the superior method of raising the equity they have secured in single-tenant real estate. In any case, CTL is worth considering as an alternative to selling.
