Website design By BotEap.comMany good quality single tenant net leased properties qualify for both credit tenant lease financing (CTL) and conventional commercial mortgage loans. Net lease property investors should consider the pros and cons of each before deciding what type of loan to commit to. Website design By BotEap.comCTL loans are generally best for the long-term income investor who wants permanent financing, high leverage, fixed rate, fully amortized, and wants speed and certainty of execution. Bank loans have a lower initial cost (but not total) and can offer a greater variety of terms and conditions. Banks are best for investors who need options, don’t need maximum leverage (they have a large down payment available), and are unsure whether they will keep a property for the long term. Website design By BotEap.comThe difference Website design By BotEap.comCTL loans combine aspects of commercial mortgage loans with specialized investment banking to close deals. A CTL banker issues and sells private placement corporate bonds that are secured by the lease of real estate. The proceeds from the sale of bonds are used to finance a commercial mortgage loan for the borrower. The loan is administered by a third party trustee during the term of the agreement. Website design By BotEap.comTraditional commercial mortgages are standard loans secured by mortgage bonds against real estate, the income from the property, and the borrower’s credit. Banking institutions originate a loan and finance the deal, either by selling the loan to an investor (private or government) or by lending their own funds and keeping the loan in their portfolio. Website design By BotEap.comTo take advantage of Website design By BotEap.comThe current credit crisis has forced banks to toughen their lending criteria. It is highly unlikely that a commercial bank will offer more than 75% loan to value (LTV) on any deal today. Banks have no incentive to take unnecessary risks; They can borrow money from the Federal Reserve (Federal Reserve Bank) at 0% percent and buy 10-year Treasury bonds at 2% and earn 2 points without risk. They will transfer high-leverage loans and will only lend when they have large amounts of hedging capital. Website design By BotEap.comCTL lenders will lend up to 100% LTV (Lease Rate Valuation) without recourse. They are in the business of lending the full present cash value of a lease (against future guaranteed income). CTL bankers, without question, make the highest loan offers in the commercial real estate finance industry. Website design By BotEap.comSpeed and certainty of execution Website design By BotEap.comCTL loans can close in about 1/3 the time it takes to close a conventional commercial mortgage. CTL deals are known to be completed, start to finish, in as little as 45 days (unheard of in the world of commercial banking), but typically take 60 days. Website design By BotEap.comBank loans take at least 60 days, sometimes 180 or more. Also, because CTL deals qualify or not, a banker can give a borrower a solid yes or no very quickly. There are a thousand ways a bank loan can fail, but once a CTL banker commits to a deal and a borrower signs, there is close to 100% foreclosure certainty. Website design By BotEap.comResource Website design By BotEap.comCTL loans are all non-recourse loans secured by the income from the lease. Website design By BotEap.comBank loans are generally, but not always, standard, credit-driven, full recourse loans with liens against the borrower and the real estate. Website design By BotEap.comcost Website design By BotEap.comA CTL loan will have higher upfront costs due to the investment banking aspect of the deal and the fact that a third-party trustee must be involved. However, during the life cycle of a property, CTL tends to be less expensive because you never have to refinance. At the end of a CTL loan, the borrower owns the property free and clean. Website design By BotEap.comBank loans must be recapitalized or paid off at the end of each term, typically 3, 5, 7, or 10 years. Having to refinance so frequently results in a higher total cost of capital. Website design By BotEap.comFlexibility Website design By BotEap.comCTL loans are somewhat less flexible than standard bank loans. The bonds sold by CTL bankers are regulated by the securities industries and the insurance industries. CTL lenders must meet very strict criteria and are not allowed to deviate from the standards. A deal qualifies for CTL or not; there is no room for maneuver. Website design By BotEap.comBanks generally have many loan platforms available; they can tailor a loan to a particular situation or a particular property. Website design By BotEap.comTerms Website design By BotEap.comBanks can offer self-amortizing loans, but they generally issue 3,5,7 or 10-year mortgages that pay off in 10-25 years with balloon payments due at the end of each term. Banks can also offer fixed or adjustable fees. Website design By BotEap.comCTL loans are all long-term, fixed-rate, fully amortized loans with terms that match the lease. Website design By BotEap.comIn summary Website design By BotEap.comBanks offer a greater variety of loan products and can make loans against more types of properties and tenants. Bank loans also tend to be less expensive in the short term. Website design By BotEap.comOn the downside, banks are unwilling to offer high LTV loans and will generally require the borrower to guarantee a loan. Also, bank loans are notorious for failing and not closing for any number or reasons (or no reason at all). Website design By BotEap.comCTL loans are rigid in their rating standards, but close with close to 100% certainty. They close faster and are less expensive over the life of a deal. CTL bankers do not place restrictions on LTV or LTC (loan at cost) and are non-recourse loans. Also, it should be noted that CTL loans are administered by an outside trustee throughout the life of a loan. The trustee will collect the rent, pay the mortgage, and distribute the proceeds to the borrower each month. Website design By BotEap.comCTL loans are best for buying and retaining investors who want to keep today’s low rate for the long term. They are also appropriate for investors who need high-leverage financing or are looking to close as soon as possible. Website design By BotEap.comBank loans are best for deal investors who need some flexibility in the underwriting process. Bank loans will cost less upfront and qualify for more deals. Banks offer more loan options to qualified borrowers. Website design By BotEap.comSingle-lease net lease real estate investors who understand their options will be well equipped to make the best financing decisions for themselves and their businesses.