A long-term net lease, typically 10 to 25 years, to a financially strong tenant (the "credit tenant") whose creditworthiness is sufficient to support real estate financing on its own. Credit tenants are usually investment-grade corporations: national retailers, pharmacy chains, banks, government agencies, and healthcare systems.
In a credit tenant lease (CTL), lenders evaluate the tenant's credit rather than the underlying real estate when underwriting a loan. Because the income stream from a creditworthy tenant is highly predictable, CTL financing resembles bond financing and can achieve lower interest rates. The lease is typically absolute net or bondable net, meaning the tenant assumes all expenses including structural items, and contains minimal termination rights, creating a very landlord/lender-favorable structure. CTL properties trade at low cap rates because the risk-adjusted income stream is perceived as highly secure.
A credit tenant lease structured as "absolute net" includes a provision allowing the landlord to pass through all capital expenditures, including roof replacement and structural repairs, as operating expenses. The tenant, relying on standard NNN assumptions, does not review the full expense pass-through language and ends up bearing structural costs that most NNN leases would assign to the landlord.
If you are a large national tenant signing a long-term net lease, scrutinize absolute net and bondable net provisions carefully. The landlord's desire for CTL financing creates pressure to shift all risk to you. Engage real estate counsel experienced with credit tenant transactions to protect your interests.
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Find My OverchargesThis page provides general educational information. It is not legal advice and may not reflect the most current law in your state. Consult a licensed attorney for advice specific to your situation.
