CMBS Loan Advice

Commercial real estate can be expensive. Fortunately, there are financing options that investors can use to get into commercial real estate to start, continue, or grow their careers. One particular option is the CMBS loan.

What is a CMBS Loan?

A CMBS (Commercial Mortgage Backed Securities) loan, also called a conduit loan, is used in commercial real estate and secured by a commercial property’s first-position mortgage. These loans are not standardized, so there are many variations in these types of loans depending on the financial institution used to secure the CMBS loan.

The Structure of a CMBS Loan

A CMBS loan is structured in a group of commercial loans on property types such as apartment complexes, hotels, and shopping malls. They are categorized in “tranches,” which are ranked according to quality. Higher-quality tranches receive principal payments and interest with the lowest risk. Risk increases on lower tranches. Typically, these loans have terms of five, seven, or ten years and 25-30-year amortizations. Since the term doesn’t meet the amortization schedule, there is a balloon payment at the end of the loan term, which requires payment or refinancing to satisfy. It should also be noted that a CMBS loan has two prepayment penalty structures: yield maintenance and defeasance. In yield maintenance, the loan is paid off and the mortgage note is cancelled. In defeasance, one source of collateral is replaced by another.

Uses of a CMBS Loan

A CMBS loan is typically used in the commercial real estate market. They are effective for lenders to provide loan products to borrowers without sacrificing their own liquidity. In addition, since there is no standardization in CMBS loans, they can be an effective financing option for borrowers who don’t meet the standard requirements of conventional financing options in order to invest in commercial real estate. These loans provide an alternative source of financing for investors in commercial real estate.

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