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.

CMBS loans, also known as conduit loans, are typically much easier to apply for and get approved for than traditional loans. Banks generally keep loans on their balance sheets and will usually put a lot of emphasis on a borrower’s credit score, net worth, and commercial real estate experience. This is not the case for CMBS financing, where the property itself is the most important factor in the loan approval process. CMBS lenders pool their loans together, creating commercial mortgage backed securities, and selling them to investors on the secondary market. In contrast, traditional loans are kept on the lender's balance sheet and the borrower's credit score, net worth, and commercial real estate experience are taken into account.

In general, lenders look at two major metrics when deciding whether to approve a CMBS loan; DSCR and LTV. However, they also look at debt yield, a metric which is determined by taking the net operating income of a property and dividing it by the total loan amount. This helps determine how long it would take a lender to recoup their losses if they had to foreclose on the property. And, while it’s true that CMBS loans are mostly income based, lenders still typically require a borrower to have a net worth of at least 25% of the entire loan amount, and a liquidity of at least 5% of the loan amount.

For borrowers with sufficient cash, say, 25%, who want to purchase an income-producing property, a CMBS loan is often significantly easier to get approved for, and will usually offer rates very competitive with bank financing (if not substantially better). In many cases, banks will only offer 5-year loans for commercial properties, and will generally put a lot of emphasis on a borrower’s credit score, net worth, and commercial real estate experience. This is not the case for CMBS financing, where the property itself is the most important factor in the loan approval process.

Unlike banks, which generally keep loans on their balance sheets, CMBS lenders pool their loans together, creating commercial mortgage backed securities, and selling them to investors on the secondary market. Due to risk retention rules, CMBS lenders do have to keep 5% of each loan on their balance sheet. However, this does not generally change anything for the average borrower.

General CMBS Loan Terms 2022:

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.

Yes, the vast majority of CMBS loans are non-recourse. This means that if a borrower defaults on their loan, the lender cannot attempt to repossess their property in order to get compensation for their loss. However, just like most other types of non-recourse commercial real estate financing, CMBS loans are typically subject to standard bad boy carve outs.

A bad boy carve out is a clause in the loan agreement that provides specific conditions, such as fraud, under which a loan may actually become full-recourse. For example, if a CMBS borrower misrepresented their financial strength during the loan application process, and later defaulted on the loan, the lender/investors might be able to go after the borrower’s personal property in order to compensate themselves for their financial loss.

Non-recourse loans are the opposite of recourse loans, which allow a lender to seize and sell a borrower’s personal property. Most bank loans, mini-perm loans, and commercial construction loans are typically recourse loans, while CMBS financing, Fannie Mae® and Freddie Mac® multifamily loans, mezzanine loans, life company loans, and HUD multifamily loans are generally non-recourse financial instruments.