What is Credit Tenant Lease Finance? A Technical Explanation of How CTL Loans are Funded

Credit Tenant Leases (“CTLs”) are transactions in which the cash flow from a property lease is used to pay Notes or Bonds (the “Notes”) issued to investors and also to pay all the costs

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associated with occupying, operating, and maintaining the property (or the proportionate share thereof). In examining CTL Transactions, a number of important generalizations can be made. First, the transaction’s rating is generally based on the credit quality of the tenant. Second, the cash flows from the lease are matched to the cash flows on the Notes with respect to timing and amount. (The reference to the “lease” means the tenant lease for the property. Although there can be, and often are, multiple leases, this Report will generally refer to a single lease for convenience.) Although matched, the amount of the cash flow from the lease must be greater than the cash flow required by the Notes in order to support maintenance, capital expenditures, etc., for the property. Third, the lease is generally structured so that all expenses of operation, maintenance, taxes, etc., are paid by the tenant. Generally, however, the tenant is not responsible for capital expenditures and for the personal taxes of the property owner. Fourth, the Notes are generally structured so that they amortize over the term of their life. The amortization may be full or partial. Even a partial amortization assists in reducing the bullet payment on the Notes and the consequent refinancing risk. With amortization, and if the Noteholders have security over the property, the level of risk generally decreases over the term of the transaction.

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