Credit Tenant Lease(CTL) Loans for Absolute NNN Properties

13 Replies

I would like to know if anyone has any experience with utilizing CTL Loans to purchase Absolute NNN properties or knows of their structuring? My goal is to purchase Absolute NNN properties to create passive income for myself. But the down payment required on NNN properties is so large and without that it's difficult to get financing. I've done some research on CTL lenders but I don't know if you'd still be able to receive income from a property even after all expenses are paid. Are all proceeds used to pay the loan off? Some CTL lenders provide 100% LTC/LTV and in some cases even more. Is there a way to structure these deals(syndication) with minimal funds out of pocket while being able to close and have passive income? Thanks for you input!

I have been looking at this structure as well. The part I have been unable to get clear on is the phantom income that is thrown off. Have you come across a good source of accounting info?

You have to look at the cap/term/etc to come up with a deal that works for CTL. I am looking to do a 100% deal that will fund an obligation I have in the future when the property is paid off..

The costs of the loan seem to very ALOT from broker to broker / lender to lender. One lender was burying 400K in costs into the deal.

So you are looking to purchase a NNN with an existing credit tenant for no money down? That would be a WIN. If there are many years left on the lease term, you have a secure income stream. What if there are only a few years left and the tenant doesn't renew? You purchased at the peak and are now left with expensive dirt. Have you considered value add commercial? Stabilized properties are going for top dollar right now.

Originally posted by @Chet Mazur :

I have been looking at this structure as well. The part I have been unable to get clear on is the phantom income that is thrown off. Have you come across a good source of accounting info?

You have to look at the cap/term/etc to come up with a deal that works for CTL. I am looking to do a 100% deal that will fund an obligation I have in the future when the property is paid off..

The costs of the loan seem to very ALOT from broker to broker / lender to lender. One lender was burying 400K in costs into the deal.

I haven't found any accounting information on this subject. But i do believe due to the structure of the financing in which the loan is sized to a 1.00x to 1.10x Debt Service Coverage Ratio, there is typically little to no cash flow available to the borrower after debt service. Instead, those cash flows are monetized upfront, thus requiring the borrower to make a smaller equity contribution or, in some cases, receiving cash at funding(Source: Click Here). I would to make this work to even be able to receive a small amount from the proceeds. Could you explain the lender you spoke of that buried 400k of cost into the deal and explain what that means. Thanks for your comment!

Originally posted by @Ash Patel :

So you are looking to purchase a NNN with an existing credit tenant for no money down? That would be a WIN. If there are many years left on the lease term, you have a secure income stream. What if there are only a few years left and the tenant doesn't renew? You purchased at the peak and are now left with expensive dirt. Have you considered value add commercial? Stabilized properties are going for top dollar right now.

 Yes I've considered what you're speaking of. But the properties I'm looking at have at least 15+ years left on the lease term and/or are new construction with new leases. And the properties have investment grade tenants such as Dollar General, CVS, Walgreens, etc. I'm trying to construct a strategy where I can create passive income utilizing a CTL loan. If you have a way or a reference to make this happen please let me know. Thanks. 

Have you looked at zero cash flow properties?  What is your goal and how much cash would you be willing to put into a purchase?  Are you looking at taxable losses to offset other gains?  Are you experienced commercial investors?  Do you have relations with lendors?

Do you have equity in another asset that can be used in lieu of a down payment?

At the bottom 5 to 6 years ago cap rates were high so on a Pharmacy you might could get in with as little as 5% down. These days 25% minimum.

I do not know any lenders that let you put no money down on STNL NNN properties. Today if anything you put more down to keep DSCR lender ratios in check. All my clients tend to be multi millionaires that buy these. They either own a business, sold a business, high level corp executive, large inheritance,etc.

Originally posted by @William M. :
Originally posted by @Chet Mazur:

I have been looking at this structure as well. The part I have been unable to get clear on is the phantom income that is thrown off. Have you come across a good source of accounting info?

You have to look at the cap/term/etc to come up with a deal that works for CTL. I am looking to do a 100% deal that will fund an obligation I have in the future when the property is paid off..

The costs of the loan seem to very ALOT from broker to broker / lender to lender. One lender was burying 400K in costs into the deal.

I haven't found any accounting information on this subject. But i do believe due to the structure of the financing in which the loan is sized to a 1.00x to 1.10x Debt Service Coverage Ratio, there is typically little to no cash flow available to the borrower after debt service. Instead, those cash flows are monetized upfront, thus requiring the borrower to make a smaller equity contribution or, in some cases, receiving cash at funding(Source: Click Here). I would to make this work to even be able to receive a small amount from the proceeds. Could you explain the lender you spoke of that buried 400k of cost into the deal and explain what that means. Thanks for your comment!

William Blair & Company - Wikipedia is the firm. I didn't have this experience directly, but was warned of it by another lender.

Originally posted by @Ash Patel :

So you are looking to purchase a NNN with an existing credit tenant for no money down? That would be a WIN. If there are many years left on the lease term, you have a secure income stream. What if there are only a few years left and the tenant doesn't renew? You purchased at the peak and are now left with expensive dirt. Have you considered value add commercial? Stabilized properties are going for top dollar right now.

CTL or zero cash flow are the only type on financing where I have seen 100% LTV, which if you don't have the $$$ to leverage, seem like a good deal.

Originally posted by @William M. :

I would like to know if anyone has any experience with utilizing CTL Loans to purchase Absolute NNN properties or knows of their structuring? My goal is to purchase Absolute NNN properties to create passive income for myself. But the down payment required on NNN properties is so large and without that it's difficult to get financing. I've done some research on CTL lenders but I don't know if you'd still be able to receive income from a property even after all expenses are paid. Are all proceeds used to pay the loan off? Some CTL lenders provide 100% LTC/LTV and in some cases even more. Is there a way to structure these deals(syndication) with minimal funds out of pocket while being able to close and have passive income? Thanks for you input!

Here's one scenario currently listed for sale (no affiliation) :

Walgreens asking price:  $5114504

Rent Roll:  $335000 annual - No rent increases from now until forever it appears

Absolute NNN

CAP rate: 6.55% (this is higher than a lot of them, I'm guessing due to the lack of rent increases)

If you could find 100% financing for 30 years at 5% you would still have negative cash flow.  

This doesn't take into account purchase expenses which can be substantial.

If you paid asking price you would cash flow -1K per year.

If you get the same property for 5MM you would cash flow about 6K per year.

If you get the same property for 4.9MM you would cash flow about 13K per year.

You would however have a million dollars (or close to it) paid down on the loan after 10 years.

Now where can we find 30 year terms @  5% with no skin in the game?  

Maybe you only need a 10 year term but 30 amt and plan to sell or refi to cash out that equity. But you still need a 100% LTV lender that will do 5%.

Chris

According to the broker I have been speaking to and their magic calculator (which they keep close at hand), 15 yr term, CAP >6%, and the right lease rate is the magic. They gave me this as back of hand numbers to sort through the properties for sale.

Chris Wallace Investor from Lebanon, Ohio, 

If you could find 100% financing for 30 years at 5% you would still have negative cash flow.

Are you using a std. mortgage calc to figure this out?

Originally posted by @Chet Mazur :

According to the broker I have been speaking to and their magic calculator (which they keep close at hand), 15 yr term, CAP >6%, and the right lease rate is the magic. They gave me this as back of hand numbers to sort through the properties for sale.

 Where does the money come from and what are the terms of the loan(s)?

Edit: Let me know if your calculator shows different numbers.  Mine used about 100k added to the loan for purchase expenses, loan origination, etc.  This is an estimate.

-Chris

This, and the tax treatment of the entity are my 2 big questions.

As far as where the $$$ come the lender issues private bonds that fund the trans action. Insurance company like CTL as the are accounted for differently than a CRE loan.

I haven't been able to get my hands on a "CTL" to see if and how the number are used.

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