Raising Loan-to-Value with a Credit Tenant Lease

by Holland & Knight LLP


  • Owners and developers are becoming aware of an alternative to more traditional financing products as the commercial real estate debt market continues to rise – credit tenant lease finance – which can result in both a lower interest rate and higher loan-to-value for the borrower.
  • These investments are structured to be more like corporate bonds, therefore they attract institutional investors, such as insurance companies, whose expectations and standards can be more rigorous than those of the typical commercial real estate lender.

As the commercial real estate debt market continues to rise, owners and developers are becoming aware of an alternative to more traditional financing products – credit tenant lease finance. In some instances, credit tenant lease finance can result in both a lower interest rate and higher loan-to-value for the borrower.

This financing alternative is generally suitable for property that is leased to a single investment grade (actual or implied senior unsecured debt rating of BBB – or better) tenant under a triple net lease with a minimum initial term of at least 15 years. In addition, the lease must be "financeable" (or capable of being made so through amendment), obligating the tenant to pay and perform without any ability to terminate the lease or abate rent.

A broad range of property types may be suitable for credit tenant lease financing, including:

  • ground leases
  • retail
  • hospitals and healthcare facilities
  • headquarters and office buildings
  • government facilities
  • manufacturing and R&D facilities
  • educational projects
  • warehouse and distribution facilities
  • bank branches
  • data centers

Multiple Reasons to Consider Credit Tenant Lease Finance

Owners and developers may consider this financing alternative for a number of reasons, including the following:

  • First, interest rates on this type of financing are typically lower than provided by more typical commercial real estate financing products because the interest rate is based primarily on the investment grade credit rating of the tenant.
  • Second, loan-to-values (LTVs) of up to 100 percent are possible because the principal amount of the loan will be based on the discounted value of the cash flows from the lease – rather than the appraised value of the underlying property.
  • Third, as with some other types of commercial real estate financing, credit tenant lease financing is non-recourse to the borrower (other than customary carve outs for environmental representations and warranties and "bad boy" actions).
  • Fourth, developers can use this type of financing to combine construction and permanent financing for their projects.
  • And finally, unlike some other types of commercial real estate financing, the owner generally will not be required to pledge its equity interest in the borrower to the lender.

These potential benefits do however come with a cost. Because these investments are structured to be more like corporate bonds, they attract institutional investors, such as insurance companies, whose expectations and standards can be more rigorous than those of the typical commercial real estate lender. These transactions require additional structuring and specific document provisions to satisfy investor requirements, resulting in higher transaction costs both at inception and on an ongoing basis. Owners and developers can often mitigate the increased costs of these transactions by working with business and legal advisors having specific experience with these transactions and this type of investor.

While credit tenant lease financing will not work for every type of commercial real estate investment, for those investments that fit the criteria described above, it makes sense to include it as an alternative in the consideration of potential financing options.

To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.

Written by:

Holland & Knight LLP

Holland & Knight LLP on:

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