Single Tenant Net Lease Finance Update

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I recently spoke with Tom Walsh, SVP of Grandbridge Real Estate Capital LLC. He said that current rates for high leverage credit single tenant net lease transactions for investment grade tenants range from 3.50% for highly rated credits up to 4.15% for lower rated credits. Those rates would be fully amortizing over the remaining lease term, assuming usually 15 years or longer.

For traditional financing for either rated or non-rated credits, LTVs are generally capped at 75% and rates will range from the mid to high 3%s for 5, 7 or 10 year terms with balloon payments to the low to mid 4%s for fully amortizing loans, usually 15 to 20 years.

Walsh said, "The single tenant net lease market is mostly constrained by the financial markets' overall appetite for any specific credit at a particular time, which can sometimes be volatile."

According to Walsh, there are two types of lenders who are active in the single tenant net lease space.

The first type is known as a Credit Tenant Lease (CTL) lender. CTL lenders use the tenant as the credit on the deal to effectively place the debt like it's a bond issued by the tenant.

In a CTL type loan:

  • Tenants must be "investment grade" credits. To fit into this category, tenants must have a Standard & Poors, (S&P) credit rating of "BBB-" or better. According to S&P, a “BBB-“ rating is “considered lowest investment grade by market participants”.
    • (S&P is one of the Big Three credit-rating agencies along with Moody’s Investor Service and Fitch Ratings. These agencies are known as the major players says Investopedia.)
  • Leases must be “fully net” so that the borrower has no expenses related to the property.
  • All loans are non-recourse. 

Walsh says the CTL lender “only cares about the lease and the promised stream of rent payments that will come from the lease.”

The second type of lender is life insurance companies or banks. These lenders underwrite with the possibility that the tenant will fail to pay rent and go out of business before the end of the lease term.

With this type of lending:

  • Tenant is not investment grade.
  • Loan-to-value ratios are more important to this type of lender.
  • Loan can be non-recourse, partial recourse or full recourse.

Whether or not the loan is recourse is dependent on “leverage level, tenant credit strength and a host of other parameters” said Walsh. 

He also said, “The life insurance lenders' main constraint is the level of exposure to any single credit in their loan portfolios. But a wide enough canvas of the life company market will usually end up with a satisfactory loan.”

Michael Bull, CCIM, is host of the Commercial Real Estate Show heard on 40 radio stations, iTunes, YouTube and the show web site www.CREshow.com. Michael is also an active broker and advisor with Bull Realty, Inc.a U.S. commercial real estate sales, leasing and advisory firm headquartered in Atlanta. Connect with Michael on Twitter and LinkedIn.

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