CMBS Loans vs. Portfolio Loans: What's the Difference?

Lenders Sell CMBS Loans, While Keeping Portfolio Loans on Their Balance Sheets

When it comes to commercial real estate lending, there are typically two major kinds of loans, CMBS loans, also known as conduit loans, and portfolio loans. Conduit loans and portfolio loans have several key differences— and borrowers should be aware of them before deciding which type of commercial real estate financing best fits their individual needs. 

Recourse Provisions and Prepayment

One of the biggest differences between CMBS loans and portfolio loans is that CMBS loans are typically non-recourse, while portfolio loans are not. In general, CMBS borrowers can only face a loan’s recourse provision if they engage in certain bad acts, such as fraud, or material misrepresentation of their financial assets. Also, most portfolio loans permit a borrower to use yield maintenance to prepay their loan, while many CMBS loans require borrowers to conduct defeasance to prepay. Defeasance, which involves the purchase of substitute bonds in order to replace the loan’s collateral and provide substitute income for the lender, is typically a more expensive and time consuming process. 

Borrower Eligibility and Loan Requirements

Since CMBS lenders don’t keep conduit loans on their balance sheets, in general, they can afford to be slightly more liberal when it comes to credit score and net worth requirements. While conduit loans typically require the borrower to have some amount of outside collateral, the main collateral for the loan is the property itself. In contrast, portfolio loans often have stricter credit and net worth requirements, which could put them out of reach of certain commercial real estate borrowers. 

Loan Defaults, Collateral Substitutions, and Debt Workouts

In general, portfolio lenders have a much closer relationship with borrowers, and this means that they can often provide personalized assistance and solutions in the case of a loan default. In contrast, CMBS lenders typically have to send any defaulted loans to a special servicer, who must comply with the CMBS's Pooling and Servicing Agreement (PSA), as well as the rules of the Real Estate Mortgage Investment Conduit (REMIC), which is an special purpose entity (SPE) used specifically to pool conduit loans. Due to this, CMBS lenders and special servicers cannot typically provide any form of debt workout, or any preemptive loan modifactions that a portfolio lender might be able to make. 

In contrast, it’s much easier for portfolio lenders and servicers to accept substitute or additional collateral, take an equity position, capitalize past due interest, or lend additional money as a way to prevent or solve a loan default. Because CMBS borrowers are required to form a special purpose entity, or SPE, that is bankruptcy remote, this limits a conduit loan borrower’s ability to file for bankruptcy, and since these entities are single-purpose, it also prevents the borrower from substituting or adding collateral to repay the loan. 

In addition, CMBS loans often have other requirements, such as providing regular financial reports to a servicer, as well as a property management control provision, which states that a lender can replace property management should they feel this is appropriate.