CMBS vs. Life Company Loans

Lenders Sell CMBS Loans, While Life Companies Keep Loans on Their Balance Sheets

When it comes to getting long term, fixed rate loans for commercial real estate, CMBS loans and life company loans are two of the most common options available to borrowers. While CMBS loans are issued by lenders, pooled into securities, and then sold on the secondary market, life insurance companies typically keep loans on their books. While life companies typically lend much more conservatively than conduit lenders, the fact that they keep loans on their balance sheets gives them significantly more flexibility when it comes loan defaults, debt workouts, and other issues of importance to borrowers.

Recourse and Loan Amortization

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. In addition, while the vast majority of CMBS loans are partially amortizing with 5,7, or 10 year terms, many life company loans are fully amortizing with up to 30 year terms, which means that borrowers won’t have to worry about making a hefty balloon payment at loan maturity.

Borrower Eligibility and Loan Application

In comparison to life company loans, conduit loans are typically much easier to apply for and get approved for. Since life companies generally prioritize reducing risk at all costs, it’s incredibly difficult to get a life company loan if you’re not purchasing or refinancing premium real estate. Life companies also usually look for borrowers who have excellent credit scores and high net worth. In contrast, CMBS lenders are not as concerned with these factors.

Leverage and Prepayment

In most cases, life company loans have stricter LTV requirements than conduit loans for comparable properties. While most CMBS lenders permit up to 75% LTV, life companies are slightly more conservative, with average maximum LTV allowances generally ranging between 65% and 70%, with 75% LTV allowed for certain high-quality multifamily properties and commercial properties with strong anchor tenants. When it comes to prepayment, CMBS and life company loans are relatively similar; both generally offer either defeasance or prepayment premiums, or the borrower’s choice of the two. In the case of CMBS loans, prepayment premiums are structured as yield maintenance, while for life company loans, prepayment premiums are generally structured as step-downs or soft-step downs.

Earn-outs, Forwards, and Rate Locks

In addition to having more flexibility when it comes to loan defaults and modifications, life companies can also offer other benefits to borrowers, such as permitting earn-outs, which stipulate that a lender will increase the borrower’s loan amount if a property hits specific financial performance metrics. Plus, life company borrowers can sometimes get forward commitments from life companies, which are relatively uncommon in the CMBS lending space. In many cases, life company loan borrowers can also get a rate lock at application, while CMBS loan borrowers usually have to wait until funding. However, some CMBS lenders do offer 30-day rate locks, often for a small fee.