Credit Tenant Loans, often called Credit Tenant Lease Financing, are characterized by high loan-to-value (up to 100% LTV) and low debt service coverage (as low as 1.00 DSC) ratios. This type of high-leverage lending, typically done within a triple-net lease, is dependent upon the credit tenant’s rent stream for the repayment of the mortgage loan. The rent stream (the repayment of the mortgage) is protected by lease enhancement coverages protecting against certain real-estate events (a casualty or condemnation of the property) or the failure of the landlord to satisfy its obligations under the lease.
Lease Enhancement Insurance coverages do not replace the need for other business-related coverages (liability, for example). Rather, they complement other, more typical coverages.
In the U.S., states and the federal government have the right of eminent domain, allowing them to condemn property, transferring the title from private to public ownership. The most straightforward examples of condemnation involve land and buildings that governments may seize to make way for a project they believe will serve the public good. This may be a highway but it may also be a hotel expected to attract business and generate tax revenue.
In every case where eminent domain is exercised, the condemning authority must provide “just compensation” to the owner to offset the value of the property taken. If the property owner considers the amount inadequate, they can pursue the matter in court.
This calculation—and certainly the court process—is often a long and arduous one.
For Credit Tenant Lease lenders, the uncertainty of the amount and the timeline create excessive real estate risk into what is supposed to be a credit-based transaction. To mitigate the lender’s concerns, Condemnation Insurance is available.
Highlights of the policy:
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Credit Tenant Loans, often called Credit Tenant Lease Financing, are characterized by high loan-to-value (up to 100% LTV) and low debt service coverage (as low as 1.00 DSC) ratios. This type of high-leverage lending, typically done within a triple-net lease, is dependent upon the credit tenant’s rent stream for the repayment of the mortgage loan. The rent stream (the repayment of the mortgage) is protected by lease enhancement coverages protecting against certain real-estate events (a casualty or condemnation of the property) or the failure of the landlord to satisfy its obligations under the lease.
Lease Enhancement Insurance coverages do not replace the need for other business-related coverages (liability, for example). Rather, they complement other, more typical coverages.
We are experts in the placement of all forms of homeowner’s coverage. We have standard and excess and surplus lines markets to fit any type of risk, including high value and coastal homes, including Dwelling and Fire Forms.
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This coverage is relatively new for commercial real estate investors, though the concept is not new and is common in equipment and vehicle leasing.
In an auto lease, for example, the Lessor’s return is dependent upon the value of the auto at the end of the lease. When the vehicle is leased, residual value insurance is written protecting the Lessor from a drop in the value of the auto at the end of the lease term.
Same concept, different market: If a triple net lease that includes a balloon payment is used, an element of real estate risk is introduced into a credit-based transaction.
While this doesn’t sound beneficial, a mortgage with a balloon payment is often preferred in a credit tenant lease because it benefits cash flow for the borrower that can then be used to further invest in the business or to service other debt. The risk is that, because all the rents have been used for debt service on the loan, if the value of the real estate is insufficient to cover the balloon, the loan is at risk of not being fully repaid.
Residual Value Insurance guarantees to the lender that if the asset is not of sufficient value to ensure the payment of the balloon, the final payment will be made by the insurer.
Highlights of the policy:
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