Commercial Mortgage Loans – Credit Tenant Lease Financing Readily Available For Government Buildings
March 24th, 2011 | 
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Looking for some positive news on commercial mortgage lending and commercial real estate investing? Generally speaking there is scant little to be found, but one particular sector of the industry is thriving and represents a tremendous opportunity for real estate investors and developers; government buildings. For good or for ill government is growing and growing fast.
The current administration in Washington appears particularly amenable to the expansion of government. The economic downturn that has devastated private business has proven to be a boon for the public sector. Over the next decade government agencies such-as The Social Security Administration, The Department of Homeland Security, and The Department Immigration and Naturalization will all be expanding rapidly and with that expansion will come an incredible need for office space and administrative facilities. The Justice Department is in dire need of up-to-date, modern court houses and The US Postal Service has made a multi-billion dollar commitment to new, high-tech retail postal outlets as-well-as brand new regional distribution facilities. There is a boom going on in real estate, it’s the government facilities boom and it represents some excellent opportunities for savvy investors.
In the past it was common for a government agency to own the building it worked in, but today the trend is for the actual building to be owned by an investor or developer and merely leased to the agency. The government has realized that real estate ownership is not necessarily consistent with its core mission and that they would rather have free cash flow instead of dormant equity. New buildings are being built to suit a particular government agency and then triple net leased (NNN) to that agency. In addition, the government is monetizing existing equity by executing “sale and lease back” transactions whereby they sell buildings they currently own, grab the cash, and simply lease the building back from the new owner.
Developers that used to build hotels and shopping centers are now bidding on the construction of court houses, government office buildings and post office warehouses. Investors who’ve recently been burned in privately owned commercial real estate are now lining up for the dependable income that comes from owning real estate that is used by the government.
There are two huge advantages to investing in government real estate.
First, the US Government has never missed a rent payment and has never reneged on a lease. Uncle Sam still enjoys the highest possible credit rating; they have taxing power, and if that fails they have printing presses. If you are landlord to the Government you will get paid.
The second (extremely important) factor that makes this real estate niche more attractive than almost all others right now is the simple fact that financing is readily available.
You can’t get a loan to build a strip mall, an apartment building a motel or an industrial park today. America does not need or want any more commercial real estate inventory on the market right now; about 10% of what we already have is just sitting vacant. Capital is extremely tight and lending standards are extremely restrictive…unless you are buying, refinancing or building for the government.
Property owners, commercial real estate investors and developers with projects and buildings NNN leased to the Federal Government or a Federal Government Agency are not suffering the effects of the current credit crisis that the rest of the industry is struggling with. Funds are immediately available and not hard to qualify for if your tenant is Uncle Sam.
A unique and specialized lending platform called credit tenant lease (CTL) financing makes getting a loan against a government building relatively simple. Unlike traditional commercial mortgage lending, CTL financing is underwritten based on the strength of the tenant and the structure of the lease rather than the creditworthiness of the borrower and the appraised value of the real property. With CTL lending, if the tenant is strong and the lease is tight, you can get a loan.
CTL loans are long term, non-recourse, fixed rate commercial mortgage loans that hold the lease and the income it produces as the primary collateral against the loan. Because of the straight forward nature of CTL lending, loan amounts are generally much higher than normal, bank or Wall Street loans. Many CTL lenders will lend up to 100% of the value of the building (100% LTV) or 100% of the cost of construction (100% LTC). The only restriction is that the rent collected must (slightly more than) cover the mortgage payment. Debt-service-coverage ratios (DSCR) are a very low 1.01-1.05.
Interest rates for CTL loans are based on corresponding government bond rates with a small premium applied. Deals are funded by issuing private placement mortgage backed bonds and selling them to fixed income investors. CTL loans can be written and closed in 45-60 days from start to finish; much faster than conventional commercial real estate financing that can take 90-200 days to complete.
In addition to the Feds, State, County and City Governments may also qualify if they have maintained a good credit rating with Standard & Poor’s and Moody’s.
The economic downturn and corresponding credit crunch has devastated commercial and residential real estate alike. There is no doubt that it’s tough out there, and recovery is going to take time. But opportunity can usually be found in the midst of crisis. One of the opportunities for real estate professionals is clearly to be found in government real estate. The unprecedented growth in the sector means demand will be there. The availability of financing through CTL means that the capital to fuel that growth will be there as well.
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