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CAPITAL LEASE CTL PROGRAM TARGETS SINGLE-TENANT PROPERTIES

By Donna Mitchell

Capital Lease Funding has launched a credit tenant lease (CTL) financing program that aims to offer shorter terms and better pricing for rapidly expanding marginal investment-grade development companies.

The new product caters to developers of single-tenant properties — mainly ones that contain drugstores such as Walgreens and CVS — that have BBB corporate credit ratings and loans secured by tenants’ lease payments. At press time, the New York City-based lender expected to close its first $10 million in CTL loans in early October, financing several drugstore leases in the New York metropolitan area. Capital Lease is working to provide about $500 million a year in loans under the new program.

Capital Lease Funding’s initiative coincides with the swift growth across the country of freestanding drugstores and other retailers, which is making it tough for typical lenders, namely banks and institutional investors, to keep up with demand.

“They [retail credit tenants] expanded so rapidly in the last five or so years,” said Bob Blanz, vice president of structured products for Capital Lease Funding. “We saw an opportunity to create a program that would fit the parameters on the capital market side and offer financing options for developers for those types of tenants.”

Providing liquidity for developers is one of several major benefits of the new program, Blanz said: Clients can borrow more against the values of their properties; the loan to values (LTVs) can be applied to lease terms as low as 14 years, while the loan proceeds would be equivalent to that of 20-year loans; and the typical interest rate is slightly better compared with a typical loan maturity, he said.

Before the Sept. 11 terrorist attacks in the United States, interest rates on these loans would have run 225 to 350 basis points over the 10-year Treasury rate, but Blanz said he expects that pricing to increase.

Normally retail credit tenants secure 20-year leases with the owner’s loan terms to match. The owner then borrows up to 65% of the value of the property. Capital Lease’s product allows borrowers an LTV of up to 95% under a 10-year loan structure, and is the only 10-year CTL program that allows such leverage and pricing, according to the firm.

Whereas the whole loan market for BBB credit is very small, Blanz said, the program provides more liquidity for developers building net lease properties — and it can sometimes be extended to BB-plus rated credits.

Many 20-year CTLs are structured so that they are fully paid off at the end of their maturities. Under Capital Lease Financing’s program, if the loan balance is not repaid in 10 years, the borrower can pay it off in a balloon payment or refinance it. There is also an inherent perk to the program: Tenants whose properties secure the loans normally stay in their spaces for about 20 years. Consequently, there are no rollover risks or added costs associated with changing tenants at the end of the loan term, and there is a predictable rent stream for a refinance transaction, if the developer exercises that option.

Capital Lease Financing, which specializes in providing maximum leveraged loans for properties net leased to credit tenants, can take on that level of LTV risk thanks to the commercial mortgage-backed securities market. Blanz said the company would pool the loans with other products and securitize them, rather than hold the somewhat risky loans on their books. The first batch of the new loans should be securitized in December.

Source: Salomon Smith Barney. The Retail REIT Index was designed by Salomon Smith Barney for Shopping Centers Today. The index is based on total returns (including dividends) starting at a base of 100 on December 31, 1995. For the period ending Sept. 30, the regional mall index is at 187.96, down 8.5%; the strip center index (including power, neighborhood and community centers) is at 197.26, up 0.2%; and the factory outlet index is at 130.28, down 6.7%. The index is updated monthly.