CMBS Loans

What is a CMBS Loan and how do CMBS Loans work?

CMBS Loan stands for Commercial Mortgage Backed Security Loan.  Also know as a conduit loan, these Commercial Real Estate loans are pooled with other loans with the same maturity and sold as mortgage backed security bonds to investors. CMBS loans have low rates and can be fixed for 5 or 10 years.

 

CMBS loans are quite popular at Apartment Loan Store because they are stated in nature in that they do not require tax returns. Furthermore, these loans do not require the high net worth and liquidity (cash) that most Commercial Real Estate Loans require.

 

CMBS Loan Guidelines

Loan Size:   $1,000,000 to $50,000

Term:  5 or 10 years

Amortization: 25 or 30 years

Purpose:  Purchase or Refinance.  No ground up construction

Property Type:  Multifamily, Retail, Office, Self Storage, Mobile Home Park, Industrial Warehouse, blanket residential rental properties of 5 or more.

Prepayment Penalty:  Yield Maintenance or Defeasance

Recourse:  Non Recourse

Net Worth Requirement:  Less than the loan size is ok

Post Closing Liquidity Requirement:  12 months mortgage payments

Minimum Credit Score:  660

Rates:  10 year Treasury yield plus 2.25% to 2.75%

Origination Fee:  1.00%

Other Loan Expenses:   Appraisal, Environmental Report, Property Condition Report, Legal and processing

To find out more please call one of our friendly loan specialists

 

About the CMBS Securitization Process

A CMBS lender might have between 3 and 8 securitizations annually. Importantly, all the loans that are inside the pool are held in what is called trust, and they serve for the purpose of collateral for the CMBS. For this type of securities, the secondary market is incredibly big, and it gives the commercial mortgage market lots of liquidity.

 

The CMBS is usually broken into tranches. A tranche is defined as a security broken into different pieces, yet there are a variety of levels of return, risk, as well as maturities. Pension funds have a less amount of risk. Hedge funds have high risk.

 

CMBS loans are structured to be non-recourse, fixed rate, permanent, commercial real estate loans. And their structure is according to specific as well standardized documentation and underwriting requirements. These standards are set to facilitate the final securitization of the loan.

 

CMBS loans generally give investors a lower fixed-rate if you compare them to traditional CRE loans. The quality of the tenant, quality of the property, tenant bond grade, location of property, seasoning, management, and cash flow are important factors that impact the interest rate spread in a negative or positive way.

 

Prepayment is done quite differently on a conduit loan when compared to commercial loans that are traditional. It is generally defeasance.

 

What is defeasance? The option of defeasance permits the borrower to make an exchange of a different asset that cash flows for the original loan collateral. The new collateral is usually in the form of treasury securities. Keep in mind that your CMBS loan has been pooled  with has many as a 100 or more other loans with the same maturity and sold as a mortgage backed security bond. These bonds guarantee a rate of return for the ivestors for the same maturity less 3 months of your loan term. If you as the borrower prepay the loan early, the bond holder has to go out and replace the portion of the securitization that represents your loan with another bond offering the same income.  If rates go up enough the bondholder can actually make money on this transaction. If rates go down from where your rate is when you took out the loan the bondholder will lose money and pass the loss on to you as a prepayment penalty. In some cases, the borrower may get a payment when the CMBS loan has been defeased.

 

CMBS loans most often are amortized for 25 to 30 years, with a balloon payment that is due when the term ends. Conduit loans are not put on the conduit lender’s balance sheet. They often close the loans from a warehouse line of credit or their own funds and then get these funds back when the loan is sold on the secondary market.