The CMBS Origination Process: What Borrowers Need to Know

CMBS Origination: The Basics

CMBS loan origination is the process in which a conduit lender analyzes a borrower’s commercial loan application, determines their suitability for financing, presents the terms to the borrower, and, if both parties agree, issues funds. In contrast to bank loans, the CMBS origination process can be somewhat complex, as each loan must meet specific credit standards in order to be securitized. In this process, conduit loans are pooled with other loans and sold to investors as commercial mortgage backed securities

CMBS Underwriting

By and large, the most time consuming part of CMBS origination is the underwriting process, which is intended to determine whether a borrower presents a reasonable credit risk to a lender. A lender will require third-party reports, such as a full appraisal and Phase I Environmental Assessment, and will check into a borrower’s credit history, net worth, and commercial real estate experience. While borrower credit, net worth, and experience requirements are significantly less strict for conduit loans than for bank or agency loans (i.e. Fannie Mae and Freddie Mac), having good credit and some commercial real estate ownership/management experience certainly helps.

Legal Fees and CMBS Origination

One aspect of CMBS origination that borrowers should be aware of is the fact that conduit loans often require borrowers to pay significantly higher lender legal fees than almost any other type of commercial real estate loan. Like all commercial loans, borrowers are required to pay their lender’s legal costs, but, due to the complexities involved with securitization, CMBS lender legal generally costs $15,000 for loans under $5 million, with that amount going up to $30,000 or more for larger loans, and even exceeding $100,000 or more for the largest conduit loans.

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