CMBS loans are issued by lenders and then sold on the secondary market, while life insurance companies typically keep loans on their books. In addition, CMBS loans are usually easier to apply for and get approval, while life companies are often more selective with underwriting.

Life company loans offer borrowers a number of key benefits, including long terms at fixed rates, non-recourse provisions, and fully amortizing loan terms.

CMBS loans offer borrowers a number of benefits, including the ability to get long-term, fixed-rate, non-recourse financing. In addition, CMBS loans usually have longer-term amortization periods of 25 to 30 years.

CMBS loans are typically much easier to apply for and get approved for than life company loans. CMBS lenders are not as concerned with credit scores and high net worth as life companies, who prioritize reducing risk at all costs. CMBS lenders offer benefits such as interest-only periods and full, interest-only loans, while life company loans offer significantly lower rates and better loan servicing. Life company loans have longer terms, up to 25-year, fully amortizing loans, but have stringent lending standards and don't offer as much leverage as CMBS lenders, with leverage maxing out at 70%.

Sources:

• CMBS vs. Life Company Loans
• CMBS Lenders vs. Life Companies: What You Need to Know

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.

Life company loans offer several advantages, including:

• Will consider loan modifications or special requests (i.e. secondary financing) during the loan term.
• Early rate lock (up to 90 days prior to closing).
• Non-recourse.

In addition, life company loans can offer significantly lower rates than CMBS, and, unlike CMBS loans, offer an ideal servicing experience for borrowers. Since life companies keep these loans on their books, a borrower can interface directly with their lender to discuss any issues or concerns. Also, unlike CMBS loans, life company loan rates are often fixed during the application process, so a borrower will not have to worry about rates swinging wildly upward before their closing. Life company loans offer far longer terms than CMBS— with many life companies offering up to 25-year, fully amortizing 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.

Life company loans have notoriously stringent lending standards; most properties must consist of Class A commercial real estate in a major MSA— and, unlike conduit lenders, life companies will typically look deep into borrower financials. In addition, life companies don’t offer nearly as much leverage as CMBS lenders, with leverage maxing out at 70%, and many companies only offering 50-55% leverage. Source

In general, both CMBS and Life Company Loans are non-recourse with standard “bad boy” carveouts for fraud, financial misrepresentation, and other bad acts. However, some life company loans have “burn-off” recourse provisions that expire after a few years, which can reduce risk for life insurance companies in the early stages of a loan. Source