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CRE covenant

Covenant

Covenant is a term that refers to a business’s creditworthiness or bank-ability.

Talking specifically to CRE, tenants that are more creditworthy, reduce risk to the landlord. Low credit risk tenants are called bank-able tenants.

Strong covenant tenants enable the landlord to borrow more (higher LTV) on better terms from the banks.

Since interest is a massive cost to property funds, the lower the cost of borrowing, the lower the rental the landlord has to charge to make the same return.

Generally a landlord’s preference is for strong covenant tenants on long leases (say 5 years plus) on high guaranteed escalations.

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