What is a CTL? Credit Tenant Leases in Commercial Real Estate


Key Takeaways

  • A credit tenant is a business or lessee that has exceptional credit as graded by one of the major rating agencies like Moody’s or S&P.
  • A credit tenant lease is a lease signed by a credit tenant.  Typically, they have terms of 10+ years and rental rates that may be lower than other tenants in the same property.
  • The major benefit of signing a lease with a credit tenant is the confidence that rental payments will be made on time, every month.  Ancillary benefits include the ability to attract other tenants and the attractiveness of the property when it comes time to sell.
  • The primary downside of working with a credit tenant is that they often anchor a property or are the only tenant.  So, if they were to vacate their space it could be very difficult or very expensive to repurpose for a new occupant.
  • Because of their financial strength, properties with credit tenants may be eligible for credit tenant lease financing – which is a special type of loan secured by the income stream of the credit tenant lease payments, not the property itself.  This type of financing often comes with favorable terms.

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The key ingredient that makes every commercial real estate investment work is a tenant that makes their rent payments on time, every month, with no disruptions. But, not all tenants have the same risk profile. Some are small, local companies that may not have much of a margin for error during times of economic distress. Others may be large, national companies that have the experience and resources to thrive in all phases of the economic life cycle – these are known as credit tenants.

In this article, we are going to define what credit tenants are, how they are measured, and why they can be beneficial to have on a property’s rent roll. By the end, readers will have the information needed to recognize a credit tenant and include this information as part of their pre-investment due diligence process.

At First National Realty Partners, we specialize in the acquisition and management of grocery store anchored retail centers – many of which include credit tenants. If you are an accredited investor and would like to learn more about our current investment opportunities, click here.

What is a Credit Tenant?

Let’s start with a simple definition.

A credit tenant is a commercial property tenant with an exceptionally good credit rating – as measured by one of the major credit rating agencies like Moody’s, S&P (Standard and Poors), or Fitch. For example, Walgreens is a credit tenant because they have an investment grade rating (BBB) from S&P.

What is a Credit Tenant Lease?

A credit tenant lease is simply a commercial lease that is signed by a credit tenant. While every lease is unique, credit tenant leases typically have the following general characteristics:

  • Length: They tend to have long terms, usually 10 years or more. In the case of a company like Walgreens they could stretch to 25 years.
  • Structure: Credit tenants usually prefer a “net lease” structure, which provides them with additional operational control over their property. More on this shortly.
  • Rate: Because of their size and certainty of payment, credit tenants can sometimes command a lease rate that is lower, on a per square foot basis, than what might be paid by smaller tenants in the same property.
  • Exclusions: Again, because of the leverage they have in a lease negotiation, credit tenants may sometimes negotiate a clause that eliminates any potential competition in the same property. For example, if a property owner is negotiating with Starbucks, they may have to agree to a clause that states they cannot lease space to another coffee shop on the same property.

For property owners, a lease negotiation with a credit tenant is an exercise in trade-offs. There are both benefits and risks to consider.

Benefits of Signing a Credit Tenant Lease

There is no doubt that signing a credit tenant to a lease is a good thing for property owners, investors, and cash flow. Potential benefits are described below.


Because of their credit rating, property owners can feel confident that credit tenants are going to pay their rent as agreed under the lease. Because credit tenants often lease a large amount of space, this certainty can drive consistency in cash flow through all phases of the economic cycle.

Lease Length

Because credit tenants tend to sign longer term leases, property owners can count on their lease payments for a long time. This cash flow stability can drive property values because investors like certainty.

Other Tenants

Because credit tenants are often large, national companies with strong name recognition, they tend to generate a lot of foot traffic to a property – which makes it easier to lease space to other tenants. For example, if we lease the anchor space in one of our centers to WalMart, we feel confident that leasing the other space in the center will be easier.

Ease of Sale

Because credit tenants sign long term leases, and because they are a good bet to make their rental payments, investors like to snap up these assets and are often willing to pay a premium for them.


Because credit tenants like to sign net lease agreements, the day to day work of maintaining the property is greatly reduced for property owners.


Real estate investors aren’t the only parties who like credit tenants – lenders do too. So, properties with credit tenants are often easier to finance than those without and with more favorable loan terms. For example, banks may offer higher loan to value (LTV) ratios or lower debt service coverage ratios (DSCR) to get a deal done for their borrowers. In some cases, they may even offer a non-recourse loan.

These benefits should be weighed against the potential downsides of working with a credit tenant.

Downsides of a Credit Tenant Lease

The major downside of a credit tenant lease is the risk that comes with a decision to not renew a lease or vacate their space. Because a credit tenant leases a large portion of the space, a vacancy can drive a sudden and significant drop in property income and cash flow.

In addition, credit tenant space is often built for purpose, which can make it very difficult or costly to repurpose the space for another use. For example, if a Walgreens decides to leave their property, there aren’t many options for tenants that can just move in and occupy the space.

Common Credit Tenant Lease Structures

There are two common lease structures that are commonly used in commercial real estate deals and they are referred to by their shorthand names, gross and net. The key difference between the two is which party is responsible for the operational costs and effort that comes with running the property.

In a gross lease, the tenant pays one monthly rental amount and the property owner uses these funds to pay for the expenses required to run the property – like taxes, insurance, and maintenance. For this reason, the required lease payment in a gross lease is often on the higher side.

In a net lease, the tenant pays a lower monthly rental amount – the base rent – plus their proportionate share of operating costs. The exact share has to do with the specific terms of the lease and the type of net lease signed – there are four:

  • Single Net Lease: Tenant pays base monthly rent plus one category operating expenses, usually property taxes.
  • Double Net Lease: Tenant pays base monthly rent plus two categories of operating expenses, usually property taxes and insurance
  • Triple Net Lease (NNN): Tenant pays base monthly rent plus three categories of operating expenses, usually property taxes, insurance, and maintenance.
  • Absolute Net Lease: Tenant pays base monthly rent plus all operating expenses associated with the property.

Of these four, a credit tenant is probably most likely to sign a triple net lease, but it can vary from one deal to another.

What is CTL Financing?

Because of the significant financial strength of credit tenants, some lenders often have commercial real estate loan programs targeted at these tenants. These loans are often referred to as credit tenant lease loans or “CTL Loans” for short.

As the name suggests, a credit tenant lease loan is a special type of loan that is secured by the future stream of payments of the credit tenant as opposed to the property itself in a traditional commercial property loan.

Because lenders have a high degree of confidence in the future stream of payments, their underwriting criteria may be more favorable compared to traditional commercial real estate financing. For example, the interest rate/pricing may be lower, the amortization may be longer (usually matches the lease length), the LTV ratio may be higher, or the debt service coverage requirement may be lower (<1.25x).

In short, a CTL Commercial Mortgage is a loan based on the strength of the tenant, not the borrower. In some cases, it may be a better deal. In others it may be a worse deal. As such, it is always a good idea for borrowers to evaluate all potential options and choose the one that is most suitable for their needs.

What is a Sale LeaseBack?

A sale leaseback is exactly what it sounds like. It is a transaction where a property owner sells the physical property to someone else, then simultaneously leases it back from the buyer at an agreed upon rate. This is a fairly niche transaction type, but it is common in a specific scenario – single tenant franchise locations of quick service restaurants.

For example, imagine that an individual restaurateur has worked their whole life to establish a nice business with ten McDonald’s franchises. Over time, the restaurants do well, and the real estate has appreciated significantly. Now, imagine that McDonald’s puts forth a corporate edict mandating that all restaurants renovate their stores to reflect the newest designs, technology, and finishes. The cost is $250,000 per store or $2,500,000 total that the business does not have.

In order to finance the renovations, the business owner could engage in a sale leaseback transaction with an investor in which they sell the physical property and sign a lease to remain in the same location. In many cases, this is a win/win for both parties. The business owner is able to tap their property equity to finance needed renovations while the investor gets a future stream of cash flow and a property that has full occupancy on day 1.

A sale leaseback may or may not involve credit tenants, but if it does, they tend to be more attractive. There are entire businesses that are built on the back of the example described above.

Interested in Learning More?

First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.

If you are an Accredited Real Estate Investor and want to learn more about our investment opportunities, contact us at (800) 605-4966 or info@fnrpusa.com for more information.

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