CMBS Loans and Cash-out Refinancing
The fact the CMBS loans have little to no cash-out restrictions makes them incredibly popular among commercial property owners who want to extract some of the equity from their property. Borrowers are typically only limited by the loan’s maximum LTV requirements— usually 75% for most CMBS loans.
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How to Get Cash Out With a CMBS Loan
The fact the CMBS loans have little to no cash-out restrictions makes them incredibly popular among commercial property owners who want to extract some of the equity from their properties. Borrowers are typically only limited by the loan’s maximum LTV requirements— usually 75% for most CMBS loans, which means they can often take hundreds of thousands— if not millions, of dollars in cash out of their property and put it to good use elsewhere.
For example, if a property worth $10 million has a remaining loan balance of $8.5 million, and the owner wanted to get a CMBS refinance with 75% LTV, they could take approximately $1 million out of the property.
Common Uses for CMBS Cash-Out Refinancing
CMBS borrowers often use cash-out refinances for purposes including:
Renovating the property: Cash-out refinances are a great way to get funds to remodel or renovate a commercial property— and by doing so, you’ll typically increase the property’s value— which can substantially increase your leverage when it comes time to refinance your CMBS loan.
Get working capital for a business: Instead of taking out a business loan or a commercial line of credit, CMBS cash-out refinancing can be a significantly less expensive way to get the funds your business needs to thrive.
Purchase a new property: Whether you want to expand your real estate empire or simply open a new location for your business, CMBS cash-out refinancing can help you put a down payment on a new property, or even buy it in cash.
Related Questions
What are the benefits of CMBS loans for cash-out refinancing?
CMBS loans offer several benefits for cash-out refinancing, including:
- Asset-based financing, with less strict financial requirements for borrowers
- Up to 75% Loan-to-Value (LTV) ratio
- Fixed-rate financing, with competitive interest rates (currently 4.30%-5.00%)
What are the risks associated with CMBS loans?
The major downside of CMBS loans is the difficulty of getting out the loan early. Most, if not all 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. However, this is not necessarily a con, since many other commercial real estate loans require similar impounds/escrows.
What are the requirements for obtaining a CMBS loan?
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.
Unlike borrowers for commercial bank loans, CMBS borrowers will not continue to deal with the same lender that originated their loan during the remainder of its life; instead, they will have to work with a loan servicer, referred to as a master servicer. If a borrower defaults on their loan, they will have to work with another type of servicer, known as a special servicer. This is not always ideal, as a special servicer will generally put the investor’s needs (and their interests) above the needs of the borrower.
By and large, the most time consuming part of CMBS origination is the underwriting process, which is intended to determine whether a borrower presents a reasonable credit risk to a lender. A lender will require third-party reports, such as a full appraisal and Phase I Environmental Assessment, and will check into a borrower’s credit history, net worth, and commercial real estate experience. While borrower credit, net worth, and experience requirements are significantly less strict for conduit loans than for bank or agency loans (i.e. Fannie Mae and Freddie Mac), having good credit and some commercial real estate ownership/management experience certainly helps.
To summarize, the requirements for obtaining a CMBS loan are:
- DSCR and LTV
- Debt yield
- Net worth of at least 25% of the entire loan amount
- Liquidity of at least 5% of the loan amount
- Third-party reports, such as a full appraisal and Phase I Environmental Assessment
- Check into a borrower’s credit history, net worth, and commercial real estate experience
What are the advantages of cash-out refinancing with a CMBS loan?
The advantages of cash-out refinancing with a CMBS loan include:
- Little to no cash-out restrictions, allowing borrowers to extract equity from their properties.
- Maximum LTV requirements of usually 75%, meaning borrowers can take hundreds of thousands— if not millions, of dollars in cash out of their property.
- Fixed-rate loans with competitive interest rates (right now most CMBS loans vary from 4.30%-5.00%).
What are the differences between CMBS loans and traditional mortgages?
CMBS loans are typically asset-based, meaning that a borrower may not necessarily need to have strong financials in order to get approved, as long as the property can generate sufficient income (a minimum DSCR of 1.20x is typically required). In addition, CMBS lenders typically offer leverage up to 75% LTV, which is relatively generous, considering that they often offer loans to properties in secondary or tertiary markets.
In contrast, traditional mortgages are generally based on the borrower's credit score, net worth, and commercial real estate experience. Banks will usually only offer 5-year loans for commercial properties.
Unlike borrowers for commercial bank loans, CMBS borrowers will not continue to deal with the same lender that originated their loan during the remainder of its life; instead, they will have to work with a loan servicer, referred to as a master servicer. If a borrower defaults on their loan, they will have to work with another type of servicer, known as a special servicer. This is not always ideal, as a special servicer will generally put the investor’s needs (and their interests) above the needs of the borrower.