Much good quality, single-tenant, net lease properties qualify for loan tenant leasing (Credit Tenant Leasing) financing and conventional commercial mortgage loans. Net leasing real estate investors should undertake the pros and cons of each before deciding what type of loan.
Credit Tenant Leasing lending is usually best for the long-term income investor who wants permanent, high leverage, fixed-rate, fully amortized funding, and desires speed and certainty of execution. Bank loans have a lower initial (but not total) cost and can offer a wider variety of conditions.
Banks are best for investors who need options, do not need maximum leverage (have a large down payment available), and are not sure if they will hold a property for the long run.
Credit Tenant Leasing lending combines aspects of commercial mortgage loans with specialized investment banking in-order-to-close deals. A Credit Tenant Leasing banker provides and sells private placement corporate bonds that are secured by the lease on the property. The proceeds of the bond sales are used to finance a commercial mortgage loan for the borrower. The loan is managed by a third party trustee throughout the life of the deal.
Traditional commercial mortgages are standard loans backed by mortgage loans against the property, the income generated by the property and the borrower’s loan. The banking institutions come from a loan and finance the deal either by selling the loan to an investor (private or government) or by lending their own funds and managing the loan in their portfolio.
The ongoing credit crunch has forced the bank to tighten its lending criteria. It is highly unlikely that a commercial bank will offer more than 75% loan-to-value (LTV) on every deal today. Banks have no incentive to take unnecessary risk; You can borrow money from the Fed (Federal Reserve Bank) at 0% percent and 10 year Treasury Bonds at 2% earn 2 points risk free. They will pass on high leverage loans and only lend where they have large amounts of protection equity.
Credit Tenant Leasing lenders borrow up to 100% LTV (lease fee valuation) on a non-recourse basis. In the lending business, they are the full, current cash value of a lease (against guaranteed future income).
Enforcement speed and certainty
Credit Tenant Leasing loans can take around 1/3 of the time it takes to close a conventional commercial mortgage. Credit Tenant Leasing deals are known to be completed from start to finish in as little as 45 days (unheard in the world of commercial banking), but typically 60.
Bank loans take at least 60 days, sometimes 180 or more. Also, because Credit Tenant Leasing either 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 Credit Tenant Leasing banker commits to a deal and a borrower signs, there is almost 100% certainty of execution.
Credit Tenant Leasing loans are all non-recourse loans that are secured by the income that the lease produces.
Bank loans are usually, though not always, standard, credit-driven, full recourse loans with liens against them
A Credit Tenant Leasing loan will have higher acquisition costs because of the investment banking aspect of the deal and the fact that a third party trustee needs to be involved. However, over the life cycle of a property, Credit Tenant Leasing tends to be less expensive because you never refinance. At the end of a Credit Tenant Leasing loan, the borrower owns the property freely and clearly.
Bank loans must be recapitalized or paid out at the end of each term, usually 3, 5, 7 or 10 years.
Credit Tenant Leasing lending is somewhat less flexible than standard bank lending. The bonds sold by Credit Tenant Leasing bankers are regulated by the securities and insurance industries. Credit Tenant Leasing lenders must adhere to very strict criteria and must not deviate from the standards. A deal qualifies for Credit Tenant Leasing or it doesn’t; there is no scope.
Banks usually have many credit platforms available
Banks can offer self-service loans, but generally mortgages with 3.5, 7 or 10 year maturities pay off over 10-25 years with balloon payments due at the end of each term. Banks can also offer fixed or adjustable rates.
Banks offer a larger number of loan products and can go against more types of property and tenant loans. Bank loans are also less expensive in the short term.
On the downside, banks are not inclined to offer high LTV loans and will usually require the borrower to guarantee a loan. In addition, bank loans are notorious for falling and failing to close for any number or reasons (or no reason at all).
Credit Tenant Leasing loans are rigid in their qualification standards, but close to almost 100% certainty. They close faster and are less expensive about the life of a deal. Credit Tenant Leasing bankers have no LTV or LTC (loan-at-cost) restrictions and are non-recourse loans. It should also be noted that Credit Tenant Leasing loans are managed by a third party trustee throughout the life of a loan. The trustee will collect the rent, pay the mortgage and distribute the income to the borrower each month.
Credit Tenant Leasing loans are best for buying and keeping investors who want to lure in today’s low rate for the long term.
Bank loans are best for investors with deals who need some flexibility in the underwriting process. page
Bank loans are best for investors with offers who need some flexibility in the underwriting process. Bank loans cost less up-front and more offers will qualify.