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

• A 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 etate 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 addition 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

• Distribution / Depth of Market Coverage
• Structural Creativity
• 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.