Credit Tenant Loan: Using a 1031 Exchange for a Cash-out Solution

Credit Tenant Loan

The Credit Tenant Loan 1031 exchange strategy focuses on the potential of obtaining the maximum cash out of a real estate transaction. It relies on a 1031 exchange, but the exchange is only a vehicle for providing cash from the sale of the relinquished property.

Some property owners want to sell their property, cash-out, and pay the taxes rather than complete a 1031 exchange. Yet, most owners also want to reduce their taxes on capital gains from the sale. With a credit tenant loan, they may be able to do both. For this 1031 exchange strategy to be effective, the relinquished property should have limited or no debt.

The Credit of the Retail Tenant is the Collateral

The replacement property is purchased all cash via a 1031 exchange. Some time after the replacement property purchase has closed, the property is refinanced. The type of loan that is used is specific to the type of tenant and length of the lease. It is called a Credit Tenant Loan (CTL). With a CTL, collateral for the loan is not the property, it is the credit strength of the tenant. The better the tenant’s credit, the better the loan terms.

The credit tenant is typically a national company with an institutional credit rating of BBB- or higher, and the primary term of the lease should be close to 20 years or more. Replacement properties with institutional quality tenants and leases of sufficient length can make this strategy viable and are available. With a lease that is close to twenty years, Credit Tenant Loans can exceed 80% Loan to Value (LTV). Some LTV approach 90%. The loan is fully amortizing over the remaining term of the lease.

A shorter-term lease will reduce the LTV on the loan, because the length of the loan is the same as the remaining original term on the lease. If the loan/lease term is too short it can adversely affect the viability of this strategy. The loan has a one-to-one debt coverage ratio which means the loan payment is equal to the rents received from the tenant. In a loan, as leverage increases, cash flow decrease. Since the investment produces no cash flow, the loan proceeds are maximized.  Because this is a loan, it is a non-taxable event. And, since the loan is based on the tenant’s credit strength, mortgage risk to the investor is minimal.

Tax Considerations

One should note:  a CTL loan can create phantom income, which is taxable. Phantom income is effectively equal to the reduction in principal balance during the tax year. That is offset by the fact there is no cash flow from the property with which to pay tax liability. That’s why we recommend to investors, it is extremely important to evaluate the positives and negatives relative to the investor’s particular needs. Consulting with your CPA is recommended.

Cash and Equity

The net effects are very tax-efficient. By using a 1031 exchange in combination with a Credit Tenant Loan strategy, one can achieve a higher level of cash from the sale of relinquished property than by directly paying taxes. Another benefit of this strategy is that the loan on the property will be paid down according to the mortgage, which will allow gains from this property to be realized again.


IREXA® Financial Services / Wealth Strategies collaborates with CPAs, attorneys, and other tax planning professionals to assist clients with tax mitigation strategies.  IREXA® and Great Point Capital, LLC are not tax professionals or attorneys. IREXA® only provides client tax mitigation strategies through, and with the approval of, the client’s professional counsel.

Securities offered through Great Point Capital, LLC, Member FINRA/SIPC, 200 W Jackson Blvd #1000, Chicago, IL 60606, telephone (312) 356-4872. IREXA® Financial Services / Wealth Strategies is not affiliated with Great Point Capital, LLC. 


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