CTL Residual Note Financing
Alternative financing structures designed to optimize, leverage and increase return profile.
86
Completed transactions
$8.6B
In total issuance
$1.1B
2-year average issuance
CTL Residual Note Financing
The CTL Residual Note Financing vertical provides a basket of creative capital solutions designed to extend amortization in an effort to promote more leverage and/or cash flow while also catering to borrower’s desired tax outcome.
Tenant/Credit
“Credit-worthy” single tenant (multi-tenant may also work)
Lease/Contract Type
Bondable Net, Absolute Net, Triple Net, Double Net, Modified Gross, etc.
Note Term
Typically, coterminous with the remaining term of the underlying contract.
Amortization
The baseline CTL program provides for an amortization structure that either fully amortizes (or amortizes down to an amount not to exceed 5.0% of initial par) coterminous with the remaining lease/contract term.
However, there are many ways in which balloon structures may be incorporated into a CTL construct, E.g. Through the use of residual value insurance, balloon note guaranty products, and through the issuance of alternative structured products (See info on Structured Debt Products vertical).
Recourse
Non-Recourse Carveouts only
LTV
Up to 100% (using leased fee valuation methodology)
LTC
No LTC basis constraints
DSCR
Typically, 1.00x – 1.05x
Transaction Rating
Typically, CTL’s are non-rated although rating agencies are involved in certain instances, e.g. if the underlying credit is non-rated and/or to provide the overall instrument with greater liquidity.
Asset/Collateral Type
CTL financing often involves real estate collateral in which case a perfected lien (1st or 2nd) is provided. Although CTL financing may also be applied on an unsecured basis.
Financing Instrument
Typically, CTL’s are structured as either taxable private placements or 144a private placements.
Construction Funding
Yes, the program may be applied to various ground-up, redevelopment or rehabilitation construction build-to-suit projects. The financing will include various construction risk mitigants along with a capitalized interest-only period to service the debt until the time of rent commencement.
The majority of the work performed within Mesirow's Structured Debt Products vertical includes extended amortization and residual notes, often connected to that of a CTL but not always.
Extended Amortization / Residual Notes
A2 Notes
Pari-passu notes
B Notes
Subordinate zero coupon notes (capital accretion notes)
Subordinate partial coupon notes (PIK)
Balloon Note Guaranty
Tenant-driven renewal strategies
Tenant guaranteed balloons
Attractive lease renewal options
Rated Residual Notes
Mezz Debt / Equity
Credit Strips
Subordinate credit strips underneath conventional mortgage debt
Synthetic Securities
Transaction “re-packs”
Rated and non-rated
Sample Situations
Debt and equity “firepower capital” for time-sensitive closings
Property level bridge lending
Programmatic credit to real estate private equity vehicles and other institutional operators (REIT/REOC)
Credit facilities for both open-end and closed-end funds at all stages of fund-life
Bespoke capital used to facilitate DST execution
Private equity placement capital
Ad-Hoc Securitization of Loan Asset Pools
Customized Public Private Partnership Project
Project Finance (Renewable Energy, Waste to Energy, Battery Storage, Indoor Farming, etc)
Retail
General office buildings
Corporate headquarters
Medical office buildings
Data centers
Distribution centers
Athletic facilities
Hospitals
Sort and fulfillment centers
Classrooms and administration buildings
Central utility plants
Raw land
Cultural institutions
Airport facilities and hangars
Sports stadiums
Manufacturing facilities
Specialized research and development facilities
Golf courses
Apartment buildings
Student housing and dorms
*In additional to real estate collateral, Mesirow can be used to securitize underlying debt (“note on note” structures)
Corporate
Healthcare
Higher-Education (Public and Private)
Not-for-Profit
Government (Federal, State, and Local)
Public Private Partnership (P3)
Hospitality
Retail
Professional Sports
Special Situations Capital
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Distribution / Depth of Market Coverage
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Structural Creativity
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Ability to provide liquidity / Balance Sheet access when needed
What are the primary benefits of incorporating a structured debt product into a CTL capital stack?
Residual notes serve the primary benefit of promoting either more leverage and/or more cash flow for the borrower. Additionally, residual notes may also improve the borrower’s overall tax outcome.
Are the SDP instruments also typically non-recourse much like CTL?
Yes.
Any specific collateral or LTV requirements?
The source of repayment for a typical residual note is real estate. As a result the real estate attributes act as the primary underwriting criteria. The residual note initiative is not a defined “off the shelf” product with specific collateral and leverage parameters. Mesirow’s residual notes are structured on a thoughtful bespoke basis with an open-mindedness to the totality of the facts and circumstances in each specific instance.
