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Benefits Of Credit Tenant Lease Financing And Outlook For 2024

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What is a Credit Tenant Lease and how can it finance real estate projects? Managing Director and Head of Credit Tenant Lease Elyssa McMullen’s insight piece was featured in Colliers Q4 2023 Corporate Capital Outlook Report, focused on the benefits of credit tenant lease financing and the outlook for 2024.

Credit Tenant Lease (or “CTL”) financing is a method of financing real estate in which the analysis is primarily focused on the creditworthiness of the tenant under a single tenant, long-term lease as well as the essentiality of the subject property to the tenant. Unlike a typical commercial real estate loan which is underwritten and sized based on the property value, the economics of a CTL, including financing amount and pricing, are based on the underlying lessee’s credit rating, lease structure and rental payments.

CTL financing can provide leverage of up to 100% loan-to-value, and, in general, lenders are property type agnostic. Proceeds can be used to facilitate sale / leasebacks, property acquisitions, and to provide construction-to-permanent financing for build-to-suit assets. Under more customized structures, CTLs can also be used to raise liquidity for tenants via internally owned and controlled lessor entities. CTL financings are structured as fixed-rated financings with maturities that are coterminous with the underlying lease term. CTL financing tend to be most effective for long-term (15-20+ years) leases.

CTL financing is widely used in the US-market, but less so in the European market to date, and we believe there is an opportunity for European-based tenants and real estate owners to take advantage of the CTL market, including for the following:

  • Specialised Assets / Office Properties: CTL financing is an efficient method for financing office properties, particularly in the current market environment where other lenders have pulled back, as well as leases/properties with above-market rent and/or tenant improvements as the financing is based on the tenant and rental stream under the lease, not based on property type or loan-to-value.
  • Purchase Options: Operationally essential assets may have longer term leases, and/or include a tenant purchase option or ownership reversion at the end of the lease term, all of which can be efficiently financed as a CTL.
  • Highly Customized Structures: CTLs are highly customized loans that can be structured to achieve the objectives of the tenant, such as lower occupancy costs and/or longer lease term, including flat or nominal rent escalators.
  • Non-rated Tenants: CTL can be used to finance properties leased to non-rated or privately held tenants, not just those with public bond ratings.
  • Natural Currency Funding: Ability to borrow in a variety of foreign currencies.
  • Construction-to-Permanent Financing: Pricoa Private Capital’s CTL program provides an ability for “one-stop-shop” financing which includes both the construction and permanent financing as one loan.
  • Monetizing Owned Assets: An owner/occupant can utilize a sale / leaseback, including through an internally controlled ownership structure, to extract value from its real estate holdings while retaining operational control, thus providing an ability to redeploy capital for alternative uses.

The CTL market has remained very active despite the dislocation in the broader real estate financing market, and we believe that 2024 will present continued opportunities for CTL financing.

View the full Colliers Q4 2023 Corporate Capital Outlook Report here.

This article represents the views, opinions and recommendations of the author(s) regarding the economic conditions, asset classes, securities, issuers or financial instruments referenced herein. Distribution of this information to any person other than the person to whom it was originally delivered is unauthorised, and any reproduction of these materials, in whole or in part, or the divulgence of any of the contents hereof, without prior consent of Pricoa Private Capital is prohibited. Certain information contained herein has been obtained from sources that Pricoa Private Capital believes to be reliable as of the date presented; however, Pricoa Private Capital cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. Pricoa Private Capital has no obligation to update any or all of such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy or accept responsibility for errors. These materials are not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services and should not be used as the basis for any investment decision. Past performance is not a guarantee or a reliable indicator of future results. No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this report. Pricoa Private Capital and its affiliates may make investment decisions that are inconsistent with the recommendations or views expressed herein, including for proprietary accounts of Pricoa Private Capital or its affiliates. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients or prospects. No determination has been made regarding the suitability of any securities, financial instruments or strategies for particular clients or prospects. For any securities or financial instruments mentioned herein, the recipient(s) of this report must make its own independent decisions.
Pricoa Private Capital (‘PPC’) is a trading name of PGIM, Inc. (‘PGIM’), PGIM Private Capital Limited and PGIM Private Capital (Ireland) Limited. In the United Kingdom, information is issued by PGIM Private Capital Limited with registered office: Grand Buildings, 1-3 Strand, Trafalgar Square, London, WC2N 5HR. PGIM Private Capital Limited is authorised and regulated by the Financial Conduct Authority (“FCA”). In the European Economic Area (“EEA”), information is issued by PGIM Private Capital (Ireland) Limited with registered office: IDA Business Park, Letterkenny, Co Donegal, Ireland F92 FP83, Ireland. PGIM Private Capital (Ireland) Limited is authorised and regulated by the Central Bank of Ireland and operating on the basis of a European passport. ©2024 Prudential Financial, Inc. and its related entities. PPC, Pricoa, PGIM, the PGIM logo and the rock symbol are service marks of PFI and its related entities, registered in many jurisdictions worldwide. PFI of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom.
June 17, 2024

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Elyssa McMullen
Managing Director
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