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CMBS Loan Secrets
3 min read

What are the Pros and Cons of CMBS Loans?

Just like any other type of commercial real estate loan, CMBS loans have their fair share of pros and cons. However, it’s important to understand that CMBS financing occupies an incredibly useful niche in the industry— providing a reliable source of low interest rate financing to borrowers who otherwise might not qualify.

In this article:
  1. The Benefits and Drawbacks of CMBS Loans
  2. What are the Pros of CMBS Loans?
  3. What are the Cons of CMBS Loans?
  4. Related Questions
  5. Get Financing
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The Benefits and Drawbacks of CMBS Loans

Just like any other type of commercial real estate loan, CMBS loans have their fair share of pros and cons. However, it’s important to understand that CMBS financing occupies an incredibly useful niche in the industry— providing a reliable source of low interest rate financing to borrowers who otherwise might not qualify. However, CMBS loans do have risks, like tough prepayment penalties, which borrowers should keep in mind.

What are the Pros of CMBS Loans?

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 Cons of 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.

Related Questions

What are the pros and cons of CMBS loans?

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.

What are the advantages of CMBS loans?

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.

What are the disadvantages of CMBS loans?

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.

For more information, please visit www.multifamily.loans/multifamily-cmbs-loans, cmbs.loans/blog/cmbs-loans-pros-and-cons, and apartment.loans/posts/cmbs-explained.

What are the eligibility requirements for CMBS loans?

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.

What types of commercial real estate properties are eligible for CMBS loans?

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.

What are the typical interest rates for CMBS loans?

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.

In this article:
  1. The Benefits and Drawbacks of CMBS Loans
  2. What are the Pros of CMBS Loans?
  3. What are the Cons of CMBS Loans?
  4. Related Questions
  5. Get Financing
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  • Conduit Loans
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