Credit tenant properties are strategically useful for tax-sensitive investors due to unique financing and deal structuring possibilities.
A single tenant property under a long-term double or triple net lease can be a ‘credit tenant property’ if the tenant has a corporate credit rating. A credit tenant property can be financed based on the credit of the tenant rather than solely the real estate fundamentals. This financing can arise from a sale-leaseback where a corporation sells real property to an investor, leases back the property on a long term basis (usually 20+ years), and guarantees rent payments to cover debt service.
This long-term “bonded” lease backed by the credit rating of the tenant can be financed up to 95% loan-to-value (LTV) resulting in a debt-service-coverage (DSC) of 1.00. The entire rent payment goes to debt service. Pricing for highly-levered credit tenant properties is typically expressed as a percentage of equity over the debt. Tenants with higher credit ratings trade for higher equity percentages in a highly active and liquid market.
Credit tenant properties generate low volatility investment grade returns while mitigating risk. The long lease terms on credit tenant property generate reliable structured cash flows and minimize tenant turnover issues. Credit tenant properties generally outperform corporate bonds issued by the tenant because the investment is secured by the corporate guarantee of the tenant and the underlying real estate. Interest rate risk is mitigated due to long-term highly leveraged financing. The value of credit tenant property is sheltered from market cycles and local conditions due to the corporate rent guarantee and long-term financing.
Credit tenant properties do not require active supervision by the investor because all operating expenses and property management (including roof and structure) are assigned to the tenant.
