Credit Tenant Lease (CTL) Financing with Andrew Minkus

Credit Tenant Lease (“CTL”) Financing with Andrew Minkus

An interview with Andrew Minkus from Mesirow Financial: In this episode, Andrew Dick interviews Andrew Minkus, a Managing Director with Mesirow Financial. Mesirow Financial is one of the leading investment banks in the country with deep expertise placing debt for CTL transactions.

Host: Andrew Dick
Guest: Andrew Minkus

Podcast Participants

Andrew Dick

Andrew Dick is a Shareholder with Hall Render in the Indianapolis office. His practice focuses on real estate transactions and environmental law. He advises hospitals and health care systems around the country on the planning, construction and development of new hospitals, medical office buildings, surgery centers and skilled nursing facilities. 

Andrew Minkus

Andrew Minkus is a managing director in Mesirow Financial’s Credit Tenant Lease and Structured Debt Products group. He is responsible for originating and structuring senior and mezzanine debt capital primarily for clients that own commercial real estate involving strong underlying credits. Andrew also specializes in structuring public private partnership “P3” transactions along with other public sector related CTL’s.

Andrew Dick: Hello and welcome to the Healthcare Real Estate Adviser podcast. I’m Andrew Dick an attorney with Hall Render, the largest healthcare-focused law firm in the country. Please remember the views expressed in this podcast are those of the participants only and do not constitute legal advice. Today we will be talking about a unique way for healthcare providers to finance sale leaseback transactions, and build the suit facilities using credit tenant leases or CTLs for short. CTLS have been around for a while, but are becoming more popular in the healthcare industry. Typically, health care providers seeking CTL financing will hire an investment bank to assist with the structuring and placement of the CTL bonds. Mesirow financial is one of the leading investment banks in the country with deep expertise placing debt for CTL transactions. Today we will be talking with Andrew Minkus, a managing director with Mesirow financial.

Andrew, thanks for joining me.

Andrew Minkus: Yeah, thanks for having me. Glad to have the opportunity to participate.

Andrew Dick: Andrew, before we talk about CTL transactions and Mesirow financial, let’s talk a little bit about your background. You’re a Midwest guy with an undergraduate and graduate degree in finance. Early in your career, you worked for Newmark Realty Capital. Tell us a little bit about what you were doing there.

Andrew Minkus: Yeah, sure. So Newmark is, I guess we would call it a full service commercial mortgage banking firm. I spent about five years there. My primary responsibility was originating conventional commercial real estate debt associated with a wide range of commercial real estate projects, but I would say primarily four food groups, retail office, multifamily, industrial. I would say much of that debt work was placed with the company’s life insurance company correspondence. But we also originated a lot of CMBS and bank executed product as well as a little bit of hard money in bridge. So that’s what I did at Newmark.

Andrew Dick: So after Newmark you made the move to Lake Shore Management and tell us a little bit about your role there.

Andrew Minkus: Yeah, so upon relocating back to Chicago in roughly 2010 I was introduced to a local Chicago private equity shop called Lake Shore Management. Lake Shore Management is in the manufactured home community business, which is a fancy term for mobile home parks. That’s their asset of choice. They own and operate a significant portfolio of said manufactured homes. And my job there was primarily to … responsible for structuring, sourcing and doing a variety of ad hoc due diligence associated with new acquisitions. And then in addition to that, I was also responsible for a variety of just general asset management responsibilities that go along with just managing the overall performance of the portfolio.

Andrew Dick: And Andrew, after you worked at Lake Shore for awhile, you made the move to Mesirow financial where you’re currently at in Chicago. Talk a little bit about that transition and how you were introduced to Mesirow.

Andrew Minkus: So the gig at Lake Shore was actually an interim role. I was plugging a hole due to some abundance of work at the time. And I could see that role was quickly becoming a permanent role. And it was at that same time that actually the gentleman that I worked for in San Francisco at Newmark had introduced me to my current division head. They had met at a conference and we hit it off and he had just started up the group here at Mesirow. I was quickly fascinated with the opportunity. I could tell that this opportunity at Mesirow was an opportunity to just touch so many different segments of the market. This job here is really a job in real estate. It’s a job and structured finance. It’s a job in public finance. It’s a job in corporate finance. So it really has just many interesting tenants to it. Yeah, that’s why I made the leap over to Mesirow. So that was back in July of 2010.

Andrew Dick: And tell us a little bit about Mesirow, its history and the scope of services offered by the company.

Andrew Minkus: So Mesirow is a diversified financial services firm. We’re segmented into two main divisions. We’re an investment management, asset management house on one side and a capital markets investment banking on the other side. We’ve been around since 1937. We’re headquartered here in Chicago. We’ve got about 20 offices scattered across the country. A couple of international offices as well. Culturally we operate like a family office. We’re private. We’re 100% employee owned. We always have been.

Andrew Minkus: I think currently we’ve got about 16 sleeves of business, many of which are highly complementary to one another. I’ve been at Mesirow for coming up about nine years. I work in the credit tenant lease and structured debt products group. As part of the leadership team here my role is origination, structuring, debt placement, bond debt placement. We originate and structure a lot of conventional CTL debt and we also spend a lot of time with a variety of other structured products such as CTLB notes and rated bifurcated ground lease financings, and ad hoc project finance situations. We securitize special tax district work. We’ve done a little bit of asset-backed securities work. And a couple of years ago we also started a little side initiative which we generically refer to as our P3 initiative. It’s actually refer to as our infrastructure and project finance group. I’m part of the committee there. And as a result, I guess I pay a particular focus to transactions, CTL transactions and the like that have an element or touch the municipal space, the higher education space, the healthcare space and that sort of thing.

Andrew Dick: And one of the reasons we wanted to talk with you today is because of your deep expertise in CTL transactions and Mesirow’s reputation in the industry as being one of the leaders in terms of facilitating CTL transactions. Tell us a little bit about Mesirow’s CTL expertise and how many people are in the group and give us a little bit more detail on, on that.

Andrew Minkus: The CTL product has been around for probably 30 to 40 years, but I will say the business has evolved tremendously over that period of time. Back in the day we invite, we, not necessarily me, but some of the older generation, spent a lot of their time doing a lot of retail transactions. Walgreens and CVSs, and bank branches and things of that nature. It was a fairly commoditized asset class and not very unique in terms of structure and I think that’s how the business picked along for probably 20, 25 years. But over the last 10 years it’s evolved really away from retail for a lot of obvious reasons and more into dealing with government credits and project finance and corporate office facilities and facilities leased to municipalities and P3-type project.

Andrew Minkus: And the other thing that’s been interesting just from a development perspective is the asset class has largely ignored real estate. Going back 30 40 years, I would say over the last 10 years, we’ve started to ignore that fact and we’ve started to pay quite a bit of attention to real estate when and where applicable. And we started to do some really unique things and solve some really unique problems that historically nobody really had a solution for. So it’s been a fun and interesting evolution.

Andrew Minkus: But when we started the group, there were three of us originally. We’ve got about 10 now. We did a little over two billion dollars in production last year, which is a number we’re pretty proud of. I guess by way of production volume that does put us as the largest CTL group in the space. And I think I would attribute a lot of that success to the fact that we run a different business model here.

Andrew Minkus: Just being a full service investment bank we have some really unique and complimentary capabilities at Mesirow. We’re known on the street for being a bond house. Fixed income is one of the big drivers of our firm and we’ve spent a lot of time and resources to build up our distribution platform, what we would call our sales and trading force. And we’ve developed unbelievably deep relationships within the QUID marketplace. QUID was an acronym that stands for qualified institutional buyer. So we just have access to a lot more capital. We’re closer to the money than any of our competitors. And we also do a lot of regular way fixed income business that we really have our hand on the pulse of the market far more so than a lot of our competition. We’re also very creative, structurally speaking.

Andrew Minkus: We talked a little bit about the various internal resources here. We’re all so very big in public finance and there are a lot of synergies and correlations between what they do in that department and what we do in our department. And in many instances we’re melding our capabilities personnel to pursue transactions.

Andrew Minkus: And then the other thing that’s nice and unique about Mesirow is we have a balance sheet and we’ve got a lot of great support from the firm and we have access to firm capital to help support some of these CTL situation. So that’s a rather unique element just looking back at the business model.

Andrew Dick: Well Andrew, what I’ve learned over the years is that the CTL space is very … it’s a small group of of folks that work on these transactions and there isn’t a lot of information out there if you search the web. And so for our listeners, talk a little bit about what is a credit tenant lease and what makes it unique when you compare it to a traditional mortgage loan, for example,

Andrew Minkus: Unlike a traditional mortgage loan the primary underwriting consideration for a CTL is that of the underlying credit quality of the tenant or the underlying user, as opposed to with a traditional mortgage loan the primary underwriting consideration or the real estate fundamentals and the local real estate metric. CTLs, holistically, are priced and treated and structured more akin to that of an investment-grade rated corporate bond or an investment-grade rated municipal bond as opposed to, say, a mortgage investment.

Andrew Minkus: There’s a unique set of guidelines and principles that govern what we do and how we structure these bond transactions and some of those parameters are fairly unique. Again, compared with that of a traditional mortgage. So for example, some of these unique parameters would include things such as, we can underwrite down to a one-owed debt service coverage. We can underwrite up to a 100% of value. If it’s a construction project, we have no loan to cost basis constraints per se. These instruments are typically fixed-rate. They’re long-dated. I mean, we could go out 40, 50 years if we like the asset enough. So for these types of reasons, it allows us to produce some really efficient results, some really unique results compared with a traditional mortgage loan for the various transaction participants. But really the conversation centers wholly around, at least it starts and predominantly centers around underlying credit quality rather than the real estate. The real estate of the secondary consideration.

Andrew Dick: And you talked a little bit about some of the loan to value considerations that that would be involved in a mortgage loan transaction, but on a CTL there are scenarios where you could loan more than 100% of of the project costs, for example, in a new construction project. Right? I mean is is there a limit on how much these a CTL lenders will actually loan on a particular transaction?

Andrew Minkus: I would say the outside constraint is really on value much more so than loan to project costs. So the answer is really no when it comes to loan to project costs. We don’t have sensitivities about cash out financing and or how that capital is going to be applied to the operation, as opposed to a mortgage investor that’s going to probably be highly sensitive to those types of parameters. So if the economics are such that it produces a result that is equal 150% of project costs, let’s say for example, we will lend 150% of project cost so long as it meets the rest of the guidelines and principles that we have to meet.

Andrew Dick: What are some of the other benefits, Andrew, to the CTL structure? For example, is it possible to get a fixed rate lease rate for the 20 years, for example, which is almost unheard of in the traditional financing market and it seems like you can lock in a really attractive interest rate for a long period of time. Am I thinking about this correctly?

Andrew Minkus: Yeah, I couldn’t have said it any better. I think that’s one of the primary benefits to the key transaction participants. It’s really an exercise to come up with the most favorable constant, whether it’s a lease constant or a debt constant. Even if we’re backing into a rent constant that highly exceeds that of, quote unquote, market rent, given the local real estate parameters, that’s not something we’re going to be particularly sensitive to. I would say were largely ambivalent to that. I

Andrew Minkus: If it’s just a means of getting a more attractive attachment point, in other words, producing an unconventional amount of leverage, but the underlying user, then that’s what we’ll do. Or contrary to that, it can work in the opposite way where the goal might be to get the rent constant down as low as possible, and perhaps the underlying user is only looking to raise enough money to build the project, which might be far less than market value. This would be an excellent opportunity to do that. And all of the product is long-dated and it’s all fixed-rate. So really the longer the better in our universe.

Andrew Dick: And when we think of credit tenant leases I almost always think about a tenant that has an investment-grade credit rating. Talk a little bit about the underwriting requirements for a CTL. Do we have to find a tenant that has an investment-grade credit profile or can we go out and get a credit rating? How does that work?

Andrew Minkus: Yeah, a couple of comments. That’s a really good question actually. I would say that’s one common misconception in the space, but let me start by saying a common misconception in the space. But let me start by saying the typical credit profile, yes, it’s of investment-grade quality, although there are a handful of exceptions to that. So exception number one, we’ve done a handful of what we would call high yield CTLs or NEIC-3, NEIC-4 type CTL products. Now the appetite for that paper is entirely different. It speaks to a completely different audience and those deals take on a completely different shape and color, but it’s not necessarily threshold in nature if you have a slightly weaker credit.

Andrew Minkus: But even stepping aside from that, and not a lot of people realize, there’s a lot of great public and private credits out there that aren’t rated. And just because of these credits or these entities or these municipalities or healthcare systems don’t carry a credit rating, that doesn’t mean they don’t have good credit considerations.

Andrew Minkus: So in many instances, we’re able to involve a rating agency in the process and we’re able to rate the CTL transaction itself, not to be confused with the underlying credit. Yes, that’s the primary criteria for coming up with a result, but it’s the transaction itself that’s getting rated and in doing so, sometimes we can even generate a rating elevation above and beyond the underlying credit of the underlying user. Because the transaction rating takes into account two things. Number one, the credit support for the transaction as well as the real estate support, which is a naked CTL. We’re not really taking into account the real estate, at least from an NEIC perspective.

Andrew Dick: Andrew, talk a little bit about NEIC and what that means. So, it’s my understanding that those are guidelines used by the insurance industry. So for example, if a life insurance company wanted to make a CTL loan, they would be subject to those guidelines. Is that right?

Andrew Minkus: Yeah, it’s the risk capital charge designation that that’s referring to. So there’s a scale between one and six, one being the lowest designation, which carries the lowest risk capital charge, six being the highest designation, which carries the highest risk capital charge. The NEIC concept really only applies to US-based Life Insurance Companies, which happen to be the primary audience for this asset class. But yeah, when a US Life Insurance Company purchases a CTL asset or any fixed income asset, it does receive NEIC designation treatment. So the lower the risk capital designation, the more attractive the asset is to the investor. In other words, the more competitive the interest rate’s going to be.

Andrew Minkus: Because it dictates how much capital they either have to, or don’t have to, keep dry on the balance sheet. And the idea is to not keep dry powder on the balance sheet because that money just sits there and it doesn’t get deployed. So typically NEIC-1 and NEIC-2 are the two characterizations that refer to an investment-grade rated asset. So anything in the A category… A, double-A, Triple-A… would typically fall into the NEIC-1 bucket and anything in the triple-B category would fall into the NEIC-2 buckets.

Andrew Dick: So we’ve talked about life insurance companies making CTL loans or purchasing the loans. Talk a little bit about the other types of companies that would make a CTL loan or buy a CTL loan beyond a life insurance company.

Andrew Minkus: So in addition to LifeCo, Pension Money finds this asset class pretty attractive. We’ve sold and distributed a handful of product to various bond funds and mutual funds, alternative asset managers. There’s a good bit of religious money out there that finds these assets pretty attractive. And then some of the structured product vehicles that might be situated next to a conventional CTL or maybe underneath in a subordinate capacity, those types of instruments have broad appeal within the hedge fund community as well. So yeah, it’s not just the life insurance companies that are taking this product down and parking it in their portfolio.

Andrew Dick: And on the other side of the table, who are the typical tenants? We’ve talked about municipalities, non-profits. Most of our audience, they’re going to be healthcare providers or folks who develop healthcare facilities. Talk a little bit about who the borrower or the tenant could be in a CTL transaction.

Andrew Minkus: Yeah. In terms of the underlying users, like I was saying, this business has evolved quite a bit over the years, but I would say the lion’s share of the product that we see and that we’re involved with today, is going to involve of course healthcare systems. I would absolutely put that sector at the top of the list, just given a lot of the trends in that space right now. Any number of good corporate credits, whether it’s a tech, a Pharma, you know, we do quite a bit with the auto sector in Michigan for example. We financed a lot of headquarters assets for a couple of insurance companies, a couple of healthcare credits, Unilever, Verizon, companies like that.

Andrew Minkus: Higher education is another sector that’s picking up quite a bit of steam and starting to generate an appreciation for what we do in the financing space, whether it’s a student housing facility or a classroom or administrative facility. Non-profits are potential good candidates. Research institutions. Cultural institutions. Governmental entities, of course. Local governments, regional governments, state governments, and really anything that takes on that P3 profile. P3 meaning Public, Private, Partnership.

Andrew Dick: And talk a little bit about how a healthcare provider could use the CTL structure. When I’ve worked on these transactions, we’ve primarily use the CTL structure for build-to-suit medical office buildings, for example. A $30 million medical office building that will be a master leased to a non-profit healthcare system that has a double-A credit rating for example. But a CTL transaction could also be used for a sale lease-back. I mean, talk a little bit about the scope of transaction structures that you’re seeing in the market.

Andrew Minkus: Yeah. So there really are no limitations to your point in terms of transaction structure as well as product-type. So we’re involved in many transactions that involve the sale and lease-back of an asset. We do a lot of build-to-suit work. We finance a lot of facilities that are just getting renewed. So a straight recapitalization we would call that. Also a lot of just organic acquisition work and again, the instrument can be applied to any product-type. A headquarters, an auxiliary medical office building, a hospital, a central plant, a utility plant that’s servicing a healthcare campus, a data center. We don’t even necessarily need hard collateral per se. So for example, we finance tenant-improvement leases, with essentially no real property, for example. A licensing agreement, things of that nature. So again, the scope is fairly broad in terms of just the application of the product.

Andrew Dick: Andrew, when I think of CTLs, I think of a larger transaction, 30 million plus. Is that a misconception or when does it make sense to use a CTL? What is the smallest CTL you’ve worked on, to the largest, for example?

Andrew Minkus: Yeah, good question. I think I’d relegate that into the misconception category as well. So I mean, look, I don’t run around the country mentioning this… although maybe I do now that I’m on the podcast… but the smallest transaction we’ve ever done has been south of 2 million bucks. So I would say our sweet spot is probably in the $25 to $300 million range. The largest transaction that we’ve put together is a little bit north of $650 million. We have two 10-figure assignments that we’ve recently been mandated on. So there’s really no limitation. We try not to let our egos get in the way if it’s a nice clean piece of business. We’re happy to have it, even if it’s a small transaction. But also if it’s a substantial transaction, we certainly have the capabilities to handle that as well.

Andrew Dick: Great. And talk a little bit about how some of the CTLs are structured in terms of the amortization schedule. I’ve seen CTLs where the lease is fully amortizing, meaning that at the end of the 25-year lease-term, the asset is effectively owned by the tenant. But I know that there are ways to structure CTLs where they may not be fully amortizing. So talk about that structure in general.

Andrew Minkus: Yeah, so I touched a little bit in the beginning just about the general evolution of the space and the business. And the direct answer to the question, which we get quite often, is “Do CTL loans need to be fully amortizing?” The answer is a resounding, “No.” Now having said that, the conventional guidelines, that guide what we do and how we do it, technically require a conventional CTL to self-liquidate. Or have a balloon not to exceed an amount equal to 5% of initial par. However, there are many ways to extend the amortization now. So historically that didn’t really happen very often. There’s a synthetic insurance product called Residual Value Insurance and/or Balloon No Guaranteed Program that’s been around for some time, but never really utilized in a very meaningful way.

Andrew Minkus: But in addition to that, that’s really why we started this Structure Products Initiative about four years ago and we’ve underwritten a little over 4 billion within that initiative and the best way to think about it as a basket of solutions that allows us to provide for extended amortization. And we do this by way of structuring Pari Passu A2 notes and Zero Coupon B notes and Pick Bonds and Residual Certificates and all sorts of more esoteric, creative structuring work. They’re really hybrid securities that are supported with both good credit during the lease term as well as some real estate.

Andrew Minkus: I talked a little bit in the beginning about how the industry largely ignored real estate for many, many years. We’re no longer ignoring real estate, when and where applicable, and these types of structures can serve a variety of different benefits really. They can of course be used to produce more leverage. They can be used to produce more cash-flow. They can be used to ratchet-down a rent constant. They can be used to produce, in some cases, a more favorable tax outcome. So and/or any permutation of those potential benefits. So it’s been just a really interesting trend and development in this space. As I say, when and where applicable.

Andrew Dick: Andrew, over the years when I’ve worked on CTLs, some of the healthcare providers that I represent will insist upon a purchase option at some point during the term of the lease. Maybe it’s in year 10 or 15 if it’s a 25-year CTL. I know that sometimes those can be challenging to structure. Talk about purchase options in CTL transactions. How are those viewed in the market and how do you set those up from your perspective?

Andrew Minkus: So I think you’re right to suggest that purchase options can introduce some challenges. They’re not easy to structure around. I guess the best thing I would say is they need to be thought through carefully up-front. And there are different ways to structure around a purchase option. I think a lot of it hinges on the relationship between landlord and tenant, assuming they’re unaffiliated. That’s not always the case, right? Perfectly fine if they’re affiliated entities. That’s more of a synthetic arrangement, but I think we need to just appreciate perpetual ownership versus tenant reversion. What happens to the asset at the end of the term? Who is the beneficial user?

Andrew Minkus: I think the cleanest way to deal with purchase options, at least when you have two unaffiliated parties on each side of a lease, is if the purchase option carries an obligation by which the buyer or tenant is obligated to assume the existing debt, if they can’t come to an agreement on the purchase price economics that allowed the debt to be satisfied, paid off, albeit with [inaudible 00:12:28], then they get the right to assume the existing debt package. Which is not necessarily a bad outcome because we’re putting together some pretty efficient and pretty attractive financing, at least we would humbly think. That’s probably the easiest and cleanest way to deal with a purchase option.

Andrew Minkus: Now that introduces all sorts of privity into the loan documents. Again, that’s why you really have to appreciate the relationship up-front. How open-book is the relationship… which I realize is a topic maybe we’ll touch on a little bit later… but absent the ability to do that, what we would be forced to do is structure call optionality into the debt instrument to mirror that of the purchase optionality under the lease.

Andrew Minkus: That’s not an insurmountable hurdle. It’s a more challenging hurdle. It’s a less efficient hurdle. Call optionality can be very expensive. Which kind of ripples through the entire structure and it’s going to impact the landlord’s economics and of course it’s going to impact the tenants economics. So I think some of the considerations there are, you got to think about how we’re going to structure the call option. At what point in the structure does that call option and corresponding purchase option come into play? Is it a one-time right? Is it an ongoing right? Of course, the further down the road you introduce that purchase option, the more favorable the economics of that purchase option are going to be. If you’re looking at a 25-year term and there’s purchase option risk within five years, somewhere close to par, that’s going to be a very, very expensive endeavor.

Andrew Minkus: So economics is one consideration. There’s also a consideration of familiarity. So CTLs are primarily structured on a taxable basis. Not always. They can be structured on a taxable basis, not always. They can be structured on a tax exempt basis at times as well. It depends on where we’re distributing this debt instruments. So if we’re distributing the debt into the taxable corporate muni market, I would say generally there’s less resilience to absorb call option risk in a transaction. Whereas the tax exempt, like the classic muni market, they’re probably a little bit more resilient to call optionality at various points in the structure. So I think how the deal is structured, what the plan of finance is, where we’re planning to distribute the instrument all comes into play. It’s really just a long way of saying, “It’s absolutely not a threshold issue, but it’s a significant consideration and it can introduce some challenges.” But usually it’s just a challenge that can be overcome with economics. That makes sense?

Andrew Dick: It does. It does. That’s helpful. One of the questions I get from my clients is, let’s say it’s a larger health system with multiple hospitals, they’re working on a medical office building transaction, build to suit. One of the questions I would get is, “Well, why wouldn’t the health system just issue bonds and then take the capital and use it to build the medical office building?” It seems to me, Andrew, that that the CTL is designed so that the health system, for example in my world, wouldn’t have to go through a bond issue. It’s a simpler approach for one-off transactions, for example. Am I thinking about that the right way?

Andrew Minkus: Yeah, I would fundamentally agree with that. Potentially there are a few different reasons. At least we conduct a lot of surveys to generate this type of feedback of course. Some of the reasons that we find that the health care system, for example, that would endeavor to do something like this rather than issue with direct bond is, yeah. I mean, it’s a quicker process. So sometimes it’s just a function of speed of execution, right? To do something direct, the structure of public offering probably takes a little bit longer. It’s going to make a little bit more noise. It’s probably going to involve more transaction costs, more layers of legal costs, a little bit more diligence. Rating agency involvement is something that you probably aren’t going to avoid if you do a public offering or a direct deal. Whereas on a CTL, if the underlying credit already carries an independent rating, we can sort of lean on that. So it’s faster, it’s a little cleaner.

Andrew Minkus: Typically size of the deals is sometimes a big factor too, right? I mean, let’s say it’s only a $20 million assignment, not that there’s anything wrong with a $20 million assignment. But to go through the rigamarole of structuring a public offering, it might not be worth it. So I think for some of those reasons, sometimes there are internal accounting considerations or sensitivities that might trigger one structure over another.

Andrew Minkus: The other thing that comes up, this isn’t necessarily about direct or indirect, but more of a taxable versus tax exempt. But when you finance a CTL on a taxable basis, there are no use restrictions with respect to the asset. That’s something that comes into play on healthcare assets quite a bit, right? So if it doesn’t meet the private activity test or if you just want general flexibility with the asset, the CTL is a much friendlier format for that.

Andrew Minkus: So those would be a few reasons, at least that we hear from some of the health care clients why they decided to go with the CTL. It’s becoming really in vogue because there are all these auxiliary MOB facilities, you know, 20,000 feet here, 30,000 feet here. They’re smaller assignments, 15 million, 25 million. So it’s just a little bit cleaner. It’s just a little bit faster, probably a little bit smoother.

Andrew Dick: That’s helpful. When we think about build-to-suit transactions and using a CTL, it seems like there are a couple of approaches that I’m seeing in the market, Andrew. I want to get your thoughts. Sometimes the health system will have a new facility in mind. It will engage a developer on a fee for service basis and the health system may call you at Mesirow, and say, “Help me find the capital for the CTL transaction.” Another approach that’s becoming common is that some of the healthcare real estate developers will call upon a health system and say, “Hey, I know you have this new project in mind. Let me bring the CTL financing along and package all this up for you.”

Andrew Dick: What are you seeing in the market and what are the pros and cons there? It seems like if the health system went directly to you, that may be a more transparent process, potentially. Or if they use the developer model and the developer brings you along, I guess the health system would need to just make sure they fully understand how the CTL’s being set up. Am I thinking about this the right way?

Andrew Minkus: Yeah, I think you are. I think there’s really two general approaches to this when there’s a private sector developer involved. It really centers around whether the private sector is going to host more of an open-book process or whether they’re going to host more of a closed-book process. There’s nothing wrong with either process. Let me just start by saying that we probably do as much on an open-book basis as we are involved in transactions that are put forward in a closed-book basis. So no allegiance. I can’t say one’s better than the other. It really depends again on the commercial relationship between the landlord and the tenant, right? Between the private sector and the tenant, and I think a lot of it hinges on eventual benefit of beneficial ownership as well.

Andrew Minkus: But when you have a private sector developer that’s building a facility for a system and there’s really no plan on behalf of the private sector to own the asset beyond the lease term, this is what I would call more of just a pure structured-finance deal. The private sector developer, although they may technically be the landlord for 15 or 20 or 25 years, they’re really more of a straw landlord and acting in a fee-development capacity.

Andrew Minkus: This is probably a good scenario that would give rise to an open book process, right? Everybody kind of sitting around the table, negotiating all the docs in concert, the lease document, the loan documents, the developers really just working for a fee at that point. Because 100% of the rental income is probably being zapped into that CTL instrument anyway. So I would say it’s probably more common that we see that open book process and there’s complete clarity and transparency from all sides into the total economic arrangement. Everybody’s completely incentivized to come to the right place. Whether it’s enhancing a certain lease provision, everybody can see that it’s not just benefiting the landlord, it’s benefiting the tenant as well.

Andrew Minkus: Now we could have a scenario, we’ll call it scenario two, where the other private sector developer, there was an RFP that was disseminated and four different developers responded to the RFP, each with their own tract of land, that’s been in the family for 20 years. There happens to be one piece of land that’s highly desirable for the underlying healthcare system. It’s right next to their main hospital or whatever. This private sector developer has no interest in giving up the ownership to the underlying health care system. They want to keep it in the estate and keep it for the family.

Andrew Minkus: That’s probably more of an arm’s length, traditional closed-book type process, right? The landlord has its deal and the tenant has to negotiate its deal. Everybody is going to be focused on quote unquote market terms, both of which can be perfectly fair, but that would be a process that perhaps there would be less transparency. The developer may not feel obligated to disclose all of its economics.

Andrew Minkus: Now where that gets a little tricky is in that scenario, the developer might see how beneficial it may be to utilize CTL financing to finance this type of project and in doing so might ask the tenant for a few things to make the lease hyper efficient for purposes of fetching the most efficient financing. That’s where the tenant might say, “Well, you’re asking for a little bit of an off market provision here. What are you going to do for me?” Or, “Why do you need that?”

Andrew Minkus: I’ve been a tenant on a variety of medical office facilities. I haven’t had to sign a lease with provisions X, Y and Z. So it doesn’t produce the smoothest negotiation, but again, there’s nothing wrong with the closed-book process. We probably see half and half. Again, it really just hinges on the relationship between landlord and tenant and really what’s happening at the end of that lease term.

Andrew Dick: No, that, that was helpful. If it’s a closed-book process, maybe the tenant is comfortable with the economics and feels like it’s still getting a good deal so to speak.

Andrew Minkus: Yeah, exactly.

Andrew Dick: So Andrew, as we wrap up here, talk a little bit about the future of the CTL market. It seems like there’s been an upward trend and it’s becoming more popular. Where do you see the CTL market over the next three to five years?

Andrew Minkus: Yeah, that’s a great question. We get asked a lot what we think the size of our market is. Most of the transactions are structured on a private placement basis so nobody really has access to that data or at least the real data. I think right now, folks are led to believe that it’s a four to six billion dollar kind of market. I think it’s safe to say that if you asked us that question 15 years ago it probably would have been half of that. So I think a lot of that is due to some of the creativity and some of the evolution that we talked about in this space. I think to a large extent we might be responsible for a lot of that. So I think where there are creative minds and well-structured product, I think this is a segment of the market that’s going to continue to grow.

Andrew Minkus: Then I can tell you historically speaking, from a performance perspective, this is one of the best asset classes in history, because you’ve got great credit support, you’ve got good liquidation features, in many cases, self-liquidating features, but not always, and good real estate support and a lot of asset essentiality, too. So I think the trend lines look good. They look positive. We’re constantly coming up with innovative and imaginative new structures to implement CTLs and attach to CTLs, like a lot of these B notes that we underwrite. I mean, I can tell you a lot of the conventional CTL products wouldn’t have existed if not for some of those unique esoteric structures that we’ve put into the market.

Andrew Minkus: So I think it’s going to be an in vogue asset class for some time. In many cases, it’s the only way to finance these types of assets because a lot of these assets are what I would call non-commodity in nature. It’s really hard to finance non-commodity real estate assets. What I mean by non commodity is specialty real estate, like hospitals and data centers and central plants and funky things like that. The mortgage markets, the conventional mortgage, traditional mortgage loan markets, they really choke on product like that. So for that reason, this will always be around in my humble opinion. But I really think it’s going to continue to grow. At what clip? I’m not sure. That’s my two cents on the market.

Andrew Dick: Andrew, this has been a great conversation. Really appreciate your insights here. Where can our audience learn more about you and Mesirow Financial?

Andrew Minkus: Yeah, so you’re certainly free to visit the website. Our department has a page there, Andrew Minkus at Mesirow Financial. My email address is And of course my direct line 312-595-7922, be delighted to speak with anyone at any time. I really appreciate you having me.

Andrew Dick: Well, thanks again Andrew. And thanks to our audience for listening to the podcast on your Apple or Android device. Please subscribe to the podcast and leave feedback for us. We also publish a newsletter called the Healthcare Real Estate Advisor. To be added to the list, please email me at


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