Why Investors Prefer CMBS Conduit Loans
Commercial mortgage-backed securities (CMBS conduit loans) have been available since the 1990s, and they are gaining in popularity. Purchasers of large-scale commercial real estate can reap benefits from these loans. CMBS conduit loans are available for diverse types of properties such as hotels, apartment buildings and shopping centers.
CMBS Loans Pack a Double Punch
CMBS loans have the unique advantage of combining of two assets classes. The loan begins life as a traditional mortgage. A borrower applies for credit from a lender; after the mortgage is approved, it is bundled into a portfolio with many other loans. Properties in the group can range from supermarkets to cineplexes and vary in location, value and usage. The portfolio gets transferred to a trust, and the trust issues bonds that are based on the value of the loans. The bonds are as diverse as the properties, varying in yield, duration and payment schedules. As borrowers pay off their debt, the interest is added to the trust and then paid to investors based on the type of bonds that they purchased. Typically, the investors are paid in order of the rating of their bonds, from highest rated to lowest.
A Dual Asset Identity Offers Unique Advantages
For buyers who are in the market for a high-value commercial real estate property, there are several reasons why a CMBS conduit loan may be a good fit. Bankers are typically more conservative than investors. Since these loans are viewed as an investment, the underwriting terms generally allow for more flexibility than a traditional mortgage. Someone who is light on capital but has a solid record of success in commercial real estate investment may find it easier to secure approval. Unlike other types of loans where the interest rate may fluctuate based on economic conditions, the lower fixed interest rate of a CMBS loan could, over time, add considerable value to a multi-million dollar real estate purchase.
Because the mortgages are sold as securities, the terms for prepayment are also different than a conventional loan. If the loan is paid early, investors will not receive the anticipated rate of return for their bonds, so some accommodation must be made. Borrowers are usually “locked into” the loan for a period of years. After the lockout period is over, it may be possible to repay the loan through a process called defeasance that involves substituting securities for cash.
For the right commercial real estate investor, the special attributes of CMBS conduit loan may make it a perfect fit.