CMBS Loans and Co-Working Spaces: What You Need to Know
If you own one or more office properties, and you want to get CMBS financing in the near future, should you rent space to co-working companies like WeWork? The answer is complex; while co-working has been growing at a breakneck pace, with approximately 23% industry growth for the last several years, it still presents certain risks that landlords should consider.
Should Potential CMBS Borrowers Rent to Co-Working Spaces?
If you own one or more office properties, and you want to get CMBS financing in the near future, should you rent space to co-working companies like WeWork? The answer is complex; while co-working has been growing at a breakneck pace, with approximately 23% industry growth for the last several years, it still presents certain risks that landlords should consider.
Why Co-Working Spaces Present Risks to CMBS Borrowers
On paper, co-working spaces seem like fantastic tenants— and right now, the market is hot. However, since co-working spaces themselves are in the business of subleasing office space to tenants, usually on a short-term basis, the co-working business model carries with it an inherent instability.
In general, CMBS lenders aren’t opposed to co-working spaces— but in general, they prefer that co-working space occupies no more than 20-25% of an office property’s total square footage. This helps limit risk in the case that a co-working space’s clients don’t renew their leases— as that could affect the co-working space’s ability to pay rent to a potential CMBS borrower, increasing the chance of a potential loan default.
Related Questions
What are the benefits of CMBS loans for co-working spaces?
CMBS loans can provide the highest leverage loan a borrower can get for properties in secondary and tertiary markets. Additionally, CMBS lenders generally prefer that co-working space occupies no more than 20-25% of an office property’s total square footage, which helps limit risk in the case that a co-working space’s clients don’t renew their leases.
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Source 2What are the risks associated with CMBS loans for co-working spaces?
CMBS lenders prefer that co-working space occupies no more than 20-25% of an office property’s total square footage. This helps limit risk in the case that a co-working space’s clients don’t renew their leases— as that could affect the co-working space’s ability to pay rent to a potential CMBS borrower, increasing the chance of a potential loan default.
Disadvantages of CMBS financing include:
- Not serviced by initial CMBS lender
- Strict enforcement of prepayment penalties
- Higher closing costs
- Dishonest tranche ratings can have serious negative effects for borrowers and investors
What are the requirements for obtaining a CMBS loan for a co-working space?
In general, CMBS lenders prefer that co-working space occupies no more than 20-25% of an office property’s total square footage. Additionally, lenders look at two major metrics when deciding whether to approve a CMBS loan; DSCR and LTV. 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. Lastly, lenders 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.
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What are the advantages of CMBS loans over traditional financing for co-working spaces?
CMBS loans offer several advantages over traditional financing for co-working spaces. These include:
- Flexible underwriting guidelines
- Fixed-rate financing
- Fully assumable
- Lenders and bondholders can potentially achieve a higher yield on investments
- Investors can choose which tranche to purchase, allowing them to work within their own risk profiles
Additionally, CMBS loans typically have a lower loan-to-value ratio than traditional financing, which can help protect lenders from potential losses in the event of a loan default. This is especially important for co-working spaces, as their business model carries with it an inherent instability.
Source: CMBS Loans and Co-Working Spaces: What You Need to Know and CMBS loans in Apartment Investing
What are the best practices for managing a CMBS loan for a co-working space?
The best practices for managing a CMBS loan for a co-working space include limiting the co-working space to no more than 20-25% of the office property's total square footage, as well as ensuring that the co-working space's clients renew their leases. This helps limit the risk of a potential loan default in the case that the co-working space's clients don't renew their leases. Additionally, CMBS loans can be used for property acquisition, cash-out refinancing, and rate or term refinancing.
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