Commercial Real Estate Investor’s Guide to CMBS Loans
There are many loan options available if you are interested in investing in commercial real estate. An example is a Commercial Mortgage Backed Security or CMBS loan, also known as a conduit loan. This is a mortgage on a commercial property that is grouped with other commercial loans to be sold by the lender. These loans are collateral for the mortgage. Conduit loans can last from 5, 7, or 10 years and have an amortization period of about 25-30 years. Since the amortization period is longer than the actual loan period, the loan will require a balloon payment to pay off the loan balance.
Who Exactly Are the Lenders of These Loans?
They are known as conduit lenders. Conduit lenders include large investment banks and firms that offer financial services. Small banks do not offer conduit loans. They normally hold the CMBS loan for a short period of time until it undergoes securitization. This occurs when an investor purchases the interests in a loan and makes direct payments to the mortgage instead of to the lender.
What Makes a Conduit Loan Different From a Traditional Loan?
They have a fixed rate lower than that of a traditional loan. They also offer an alternative to investors who fall under the net worth requirements for regular loans. The investor should be either a bankruptcy-remote company or a branch that will be shielded in terms of economic upheaval. CMBS loans also offer insurance proceeds if the property is damaged. Prepayments for a conduit loan are also different from those for a traditional loan.
What Are the Two Different Prepayment Methods for a CMBS Loan?
Investors can choose up to two different methods. You can choose defeasance or yield maintenance. You can choose to nullify the loan by purchasing other collateral as a substitution. This requires purchasing multiple securities from the US Treasury which will cover future loan payments. There is no minimum amount to prepay. You may also even be paid during the defeasance process. However, you will also have to pay the fees of the defeasance firm you hire. Prepayments can also occur by yield maintenance which is a premium paid towards the lender. This premium allows the lender to acquire the same yield they would get if the loan was paid traditionally. Payments based on the principal balance and the prepayment penalty must still be paid.
CMBS loans offer many advantages and are available to investors that may not qualify for standard loans. You will need to understand not only the role you will play as an investor, but also the role your lender will have. That way you will be prepared to know what the loan entails and any prepayment penalties you may choose to pay.