Sponsorship Matters - Even in STNL Properties

In the world of single-tenant net lease (STNL) properties, the significance of sponsorship cannot be overstated. While the credit rating of the tenant often takes center stage in discussions, it is the sponsor's financial strength and experience that frequently tip the scales in securing favorable lending terms. This emphasis on sponsorship quality is particularly crucial in today's lending environment, where underwriting standards have become more stringent than ever.

The quality of sponsorship is evaluated based on several critical factors, including the sponsor's net worth, liquidity, and global cash flow. These metrics provide lenders with a comprehensive view of the sponsor's ability to support the property financially, especially if the tenant defaults. The days when almost anyone could qualify for a commercial loan with minimal scrutiny are long gone. Today, lenders meticulously assess the sponsor's financial stability to ensure they can weather any disruptions in rental income.

Current commercial real estate lending practices reveal a preference for permanent financing capped at 60 to 65% of the lesser of loan-to-value (LTV) or loan-to-cost (LTC) as opposed to 75 to 80% a few short years ago. As credit ratings fall below investment grade and tenants default on leases and close stores at an alarming rate, we see lenders refocusing on what they can control in the underwriting process: determination of the debt service coverage ratio (DSCR). The DSCR, a measure of a property's ability to cover its debt obligations from its net operating income, serves as the cornerstone risk ratio. We are seeing lenders increase this ratio from 1.15 to 1.2x to 1.25 to 1.3x. This is sometimes stressed with an underwritten rate (floor rate) and a shorter amortization period. If the DSCR is too low, lenders can cut proceeds or require the sponsor to provide a layer of recourse to get to the target loan proceeds.

One of the key considerations for lenders is the potential scenario where the tenant goes dark and stops paying rent. In such cases, the lender needs assurance that the borrower can continue making loan payments until a new tenant is found. This is where the sponsor's liquidity and global cash flow become critical. A sponsor with substantial liquid assets and diversified income streams is far better positioned to manage temporary vacancies and maintain the property's financial health.

Moreover, the sponsor's experience in managing and leasing commercial properties is a significant factor. Lenders prefer sponsors with a proven track record in real estate over those with little to no experience. For instance, a seasoned real estate investor who has successfully navigated market cycles and filled vacancies is a more attractive borrower than, say, a physician who lives 2,000 miles away who recently executed a 1031 exchange and lacks real estate expertise. Experience in backfilling vacancies and managing tenant relationships is invaluable in maintaining property performance and lender confidence.

In conclusion, while the credit rating of the tenant remains a vital component in STNL property financing, the importance of sponsorship quality cannot be ignored. Lenders today prioritize sponsors with robust financial profiles and extensive real estate experience. Ensuring strong DSCR, net worth, liquidity, and global cash flow are crucial elements in securing favorable loan terms. As the commercial real estate landscape continues to evolve, the role of a knowledgeable and financially sound sponsor will remain pivotal in the success of STNL property investments.

Since 1994, the principals of Bison Financial Group have arranged construction, bridge, and permanent financing on single tenant net leased properties through a network of institutional and private lenders.