CMBS loans provide a reliable source of low-interest financing to borrowers who otherwise may not qualify. However, they do have notable risks, like difficult and expensive prepayment penalties.

CMBS loans have several advantages, including flexible underwriting guidelines, fixed-rate financing, full assumability, and the potential for lenders and bondholders to achieve a higher yield on investments. Investors can also choose which tranche to purchase, allowing them to work within their own risk profiles. Additionally, CMBS 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). Finally, 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.

The major disadvantages of CMBS loans include:

• Less autonomy in the operation of the property and limited flexibility to deviate from the terms of the loan documents.
• Difficulty in releasing collateral.
• Expensive to exit.
• Lock outs often prevent prepayment or up to two years.
• Reserves required.
• Secondary financing (i.e. mezzanine debt or preferred equity) not always allowed.
• 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.

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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. Additionally, 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.

In order for investors to work around the fact that CMBS financing is generally not available for owner-occupied properties, a real estate firm or similar entity would have to take out the CMBS loan on the property, and then lease it to the owners of the hospital or healthcare firm.

When it comes to longer-term, fixed-rate financing for stable retail properties, CMBS lenders generally prefer retail assets with strong, long-term anchor tenants as well as properties managed by experienced organizations.

CMBS loans can be used to finance a variety of commercial real estate properties, including retail, office, and mixed-use properties. Retail properties are generally preferred by CMBS lenders, as they tend to have strong, long-term anchor tenants and are managed by experienced organizations. Office assets are also popular in the CMBS loan market, and can be used for the acquisition, cash-out, or rate and term refinancing of Class A and Class B office properties. Mixed-use properties have also become increasingly popular in recent years, and CMBS loans can be used to finance a wide selection of these properties, ranging from small apartment buildings with a few commercial tenants to larger complexes with living spaces and retail stores, restaurants, or entertainment businesses.

Interest rates for CMBS loans vary by the day but usually stay within a tight range for most borrowers, with exceptions for particularly desirable or particularly risky properties. CMBS loan rates are generally based on the swap rate, plus a margin, also known as a spread, which compensates a lender for their risk and provides for their profits. The actual interest rate on your loan will generally be based on current U.S. Treasury swap rates. This often is lower for CMBS loans than for traditional commercial property mortgages.

CMBS loans are typically fixed-rate, though floating-rate CMBS financing does exist. Conduit loans commonly begin at $2 million, though some lenders will go as low as $1 million.