Capital Lease Funding (CLF), a New York-based commercial real estate lender, has taken its message promoting securitized credit lease financing on the road this spring through a series of seminars. The sessions, titled "Financing Properties Net Leased to Credit Tenants," are co-sponsored by Shopping Center World and National Real Estate Investor magazines.

Designed to inform the audience about the advantages and pitfalls inherent in financing such properties on Wall Street, the seminar provides attendees with detailed information on structuring transactions to take full advantage of the benefits of credit tenant net lease financing. Among those benefits are tighter spreads on loans and significantly higher proceeds for the borrower.

Seminars held earlier this year in Los Angeles and San Francisco are also being conducted in a series of sessions in five other U.S. cities. The first of the day-long seminars was held in Dallas on May 11, and the following day in Atlanta. This month, three more seminars are scheduled for:

* the Chicago Hilton on June 16;

* the Bellevue Park Hyatt in Philadelphia on June 17;

* and the Copley Plaza Hotel in Boston on June 24.

The cost of the seminar is $95 per attendee and includes lunch. The sessions run from 9 a.m. to 4 p.m. and are preceded by a networking reception at 8 a.m. For registration information call Mary Kay Downey at (212) 217-6300.

Seminar highlights The Atlanta seminar was held at the Swissotel in Buckhead and featured presentations by a number of CLF executives, including William Pollert, president and CEO; Paul McDowell, senior vice president and general counsel; and Edwin Glickman, executive vice president of product development. The program also included representatives of other industries involved in the financing process, including Duff & Phelps Credit Rating Co. and the law firm of Cadwalader, Wickersham & Taft.

Pollert explains that credit tenant net lease financing is becoming an important tool but points out that the real estate industry needs to be educated on the advantages of this fledgling capital source.

The distinction between a traditional conduit CMBS real estate loan and credit lease financing is clear: In a conduit loan the lender's emphasis is on the real estate, whereas in a credit lease transaction the lender's emphasis is on the lease.

"What does the lease say? What ability does the tenant have to terminate the lease or abate rents? That is what drives a credit tenant lease," says Pollert.

Historical perspective Pollert explains that before 1995-96 the only credit tenant lease loans financed on Wall Street were bond leases in which the tenant has no lease termination or rent abatement rights.

However, new programs are being introduced by lenders to allow the securitized financing of properties with triple net (NNN) and double net (NN) tenant leases. These types of leases provide tenants with varying degrees of lease termination and rent abatement rights, or "holes" in the lease.

Such programs work by essentially creating and incorporating lease enhancements that, in essence, turn the triple-net and double-net leases into bond leases by eliminating the tenant's termination and rent abatement rights, or at least protecting the investor from such an occurrence.

As a result, the investor only has to worry about the credit of the tenant, which in CLF's case is always an investment-grade tenant (rated BBB- or higher).

"Our programs include a variety of lease-enhancement mechanisms to plug the real estate 'holes' in the existing leases," says Pollert. "We can now take properties with less than perfect leases, from Wall Street's point of view, and finance them through securitization."

The enhancements used include specialized, non-cancelable insurance policies to cover the risk of tenant termination or rent abatement, or the establishment of adequate reserves to cover landlord responsibilities such as structural repair and parking issues - items that could trigger the termination or rent-abatement provisions in a lease.

During the seminar, Pollert and company define a number of "hot-button" lease provisions that owners should try to avoid due to the problems they can cause in attempting a credit tenant lease financing transaction.

"You don't want lease provisions that make allowances for things you cannot control, such as another tenant or the government," explains McDowell.

The types of credit tenant lease programs created by lenders are still evolving. CLF recently created two new programs designed specifically for shopping center properties. But Pollert emphasizes that while retail is usually the property type associated with credit tenant financing, the scope is broader. "Almost any kind of property can be financed this way as long as there is a credit tenant and a decent lease."