Are CMBS Loans Fully Amortizing?
The vast majority of CMBS loans are not fully amortizing. Instead, most CMBS loans are partially amortizing, while others have partial-term interest-only periods, or are full-term interest-only loans.Start Your Application and Unlock the Power of Choice$5.6M offered by a Bank at 6.1%$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1.4M offered by a Credit Union at 6.1%Click Here to Get Quotes!
CMBS Loan Amortization: What You Need to Know
The vast majority of CMBS loans are not fully amortizing. Instead, most CMBS loans are partially amortizing, while others have partial-term interest-only periods, or are full-term interest-only loans. The fact that most CMBS financing is not fully amortizing means that borrowers typically face a large balloon payment at the end of their loan’s term. In most cases, they’ll refinance the CMBS loan to avoid paying the balloon, either with bank financing, a loan from a private lender, or even with another CMBS loan.
What is a CMBS loan?
A CMBS loan, also known as a conduit loan, is a type of real estate loan that’s secured by a first position mortgage on a commercial property. CMBS loans are typically offered by commercial banks, conduit lenders, or investment banks, and, once they are issued, they are packaged and sold to other investors. Due to that fact that banks do not hold CMBS loans on their balance sheets, they can offer these loans to borrowers at relatively low fixed interest rates, and can also offer borrowers relatively high leverage.
What are the benefits of a CMBS loan?
CMBS loans have several incredible upsides. First, these loans are available to a wide swath of borrowers, including those that might be excluded from traditional lenders due to poor credit, previous bankruptcies, or strict collateral/net worth requirements. Plus, CMBS loans are non-recourse, which means that even if a borrower defaults on their loan, the lender can’t go after their personal property in order to repay the debt. In addition, CMBS loans offer relatively high leverage, at up to 75% for most property types (and even 80% in some scenarios).
Perhaps most importantly, CMBS loan rates are incredibly competitive, and can often beat out comparable bank loan rates for similar borrowers. CMBS loans are also assumable, making it somewhat easier for a borrower to exit the property before the end of their loan term. Finally, it should definitely be mentioned that CMBS loans permit cash-out refinancing, which is a fantastic benefit for businesses that want to extract equity out of their commercial properties in order to renovate them, or to get the funds to expand their core business.
What are the risks associated with a CMBS loan?
The major risks associated with a CMBS loan include difficulty getting out of the loan early, as most CMBS loans have prepayment penalties, and while some permit yield maintenance (paying a percentage based fee to exit the loan), other CMBS loans require defeasance, which involves a borrower purchasing bonds in order to both repay their loan and provide the lender/investors with a suitable source of income to replace it. Defeasance can get expensive, especially if the lender/investors require that the borrower replace their loan with U.S. Treasury bonds, instead of less expensive agency bonds, like those from Fannie Mae or Freddie Mac.
In addition, CMBS loans typically do not permit secondary/supplemental financing, as this is seen to increase the risk for CMBS investors. Finally, it should be noted that most CMBS loans require borrowers to have reserves, including replacement reserves, and money set aside for insurance, taxes, and other essential purposes.
How does a CMBS loan compare to other types of commercial real estate financing?
CMBS loans are attractive to lenders because they have a more predictable repayment schedule than traditional loans. They don't require much scrutiny of a borrower, and instead prioritize the asset and its cash flows in making a decision. CMBS loans can be used to fund an acquisition or for a refinance, and generally provide fixed interest rates with terms of five to 10 years, and amortization periods of up to 30 years. They may be harder to come by in smaller markets, and may have higher fees than traditional loans. Borrowers should make sure to read the fine print and understand all fees before signing a loan agreement.
In comparison to other types of commercial real estate financing, CMBS loans offer more flexibility, lower interest rates, and do not require a personal guarantee. However, they are not available in all areas and may have higher fees than traditional loans.
Are CMBS loans fully amortizing?
No, the vast majority of CMBS loans are not fully amortizing. Instead, most CMBS loans are partially amortizing, while others have partial-term interest-only periods, or are full-term interest-only loans. Interest-only CMBS loans are actually incredibly common; over 50% of CMBS loan transactions in 2018 were interest-only.