Over the past few years, we’ve seen an increase in hospitals and health care systems using credit tenant lease (“CTL”) financing for new outpatient projects. Below is an overview of CTL financing.
- Overview – CTL financing has been around for many years. In some circles, it’s referred to as lease financing or synthetic lease financing. Regardless of the name, it’s a unique way for hospitals to tap into long-term, low-cost financing based on the hospital’s credit profile. This type of financing has historically been used for academic, research and government projects. More recently, it’s been used by hospitals and health systems.
- Requirements – CTL financing typically requires a lease or guaranty of the lease by a hospital entity with investment-grade credit. The lease itself needs to be a bondable absolute net lease where the tenant is responsible for all costs associated with the project. The landlord, in most cases, won’t have any maintenance or repair obligations.
- Funding Sources – The financing is typically lined up by a financial advisor who focuses on CTL financing. The funds for the project are often secured from bond funds, life insurance companies and lenders focused on CTL lending. The cost of capital is often tied to the hospital’s credit rating, not based on the value of the real estate. As a result, CTL lenders routinely lend up to 100% of the project costs.
- Balance Sheet Impact – The financing can be structured with the tenant paying rent in an amount equal to interest on the loan or based on principal and interest. The rent amount, length of lease term and other factors impact how the lease is treated on the hospital tenant’s balance sheet. CTL lenders are often able to structure the lease terms to minimize the impact of the lease on the hospital’s balance sheet.
- Type of Projects – Since CTL lenders aren’t underwriting the real estate asset, hospital systems can use CTL financing for any type of real estate project. We typically see it used for ambulatory surgery centers, specialty hospitals and medical outpatient projects.
For additional information on this topic, please contact:
- Andrew Dick at adick@hallrender.com or (317) 977-1491;
- Joel Swider at jswider@hallrender.com or (317) 429-3638; or
- Your primary Hall Render or Hall Render Advisory Services contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
