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CMBS Loan Secrets
1 min read

CMBS Structure: What You Need to Know

A CMBS, or Commercial Mortgage Backed Security, consists of a group of commercial property loans that have been pooled together and securitized, in order to be sold to investors. These securities are broken into various layers, or tranches, each of which has a different level of credit quality, carries a different amount of risk, and offers a different return for investors.

In this article:
  1. How Commercial Mortgage Backed Securities Are Structured
  2. To learn more about CMBS loans, fill out the form below to speak to a conduit loan expert today!
  3. Related Questions
  4. Get Financing
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How Commercial Mortgage Backed Securities Are Structured

A CMBS, or Commercial Mortgage Backed Security, consists of a group of commercial property loans that have been pooled together and securitized, in order to be sold to investors. These securities are broken into various layers, or tranches, each of which has a different level of credit quality, carries a different amount of risk, and offers a different return for investors.

The highest quality tranche in a CMBS structure will contain the highest quality conduit loans, and will be paid first, but will generally achieve the lowest return for investors. In contrast, the lowest quality tranche will contain the lowest quality loans, and will be paid last (or not at all) if CMBS borrowers default on their loans. In most cases, a CMBS will be broken into 3 or 4 tranches, but this can vary greatly depending upon the individual situation.

To learn more about CMBS loans, fill out the form below to speak to a conduit loan expert today!

Related Questions

What is a CMBS loan?

A CMBS loan, also known as a conduit loan, is a type of real estate loan that’s secured by a first position mortgage on a commercial property. CMBS loans are typically offered by commercial banks, conduit lenders, or investment banks, and, once they are issued, they are packaged and sold to other investors. Due to that fact that banks do not hold CMBS loans on their balance sheets, they can offer these loans to borrowers at relatively low fixed interest rates, and can also offer borrowers relatively high leverage.

What are the benefits of a CMBS loan?

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 risks associated with a CMBS loan?

The major risks associated with a CMBS loan include difficulty getting out of the loan early, as most 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.

What are the requirements for a CMBS loan?

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. This helps determine how long it would take a lender to recoup their losses if they had to foreclose on the property. And, while it’s true that CMBS loans are mostly income based, lenders still 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.

For borrowers with sufficient cash, say, 25%, who want to purchase an income-producing property, a CMBS loan is often significantly easier to get approved for, and will usually offer rates very competitive with bank financing (if not substantially better). In many cases, banks will only offer 5-year loans for commercial properties, and will generally put a lot of emphasis on a borrower’s credit score, net worth, and commercial real estate experience. This is not the case for CMBS financing, where the property itself is the most important factor in the loan approval process.

Unlike banks, which generally keep loans on their balance sheets, CMBS lenders pool their loans together, creating commercial mortgage backed securities, and selling them to investors on the secondary market. Due to risk retention rules, CMBS lenders do have to keep 5% of each loan on their balance sheet. However, this does not generally change anything for the average borrower.

General CMBS Loan Terms 2022:

Minimum Loan Loan Term Interest Rates Amortization Leverage DSCR Recourse
$2 million Five-, seven-, or 10-year fixed-rate loans Starting at 200 bps above relative Treasury 30 years 75% to 80% maximum LTV 1.25x minimum Non-recourse (with standard carve-outs)

What are the different types of CMBS loans?

CMBS loans are a type of financing that is provided by lenders who package and sell mortgages on to commercial mortgage-backed securities (CMBS) investors. These investors then receive the mortgage payments from borrowers. CMBS loans can be advantageous because they don’t require much scrutiny of a borrower. Rather, the loan is underwritten on the financial strength of the asset held as collateral.

CMBS loans are generally provided with fixed interest rates and have terms of five to 10 years, with amortization periods of up to 30 years. CMBS loans are available for most types of commercial real estate assets, including office buildings, apartment buildings, industrial properties, warehouses, parking garages, marinas, retail properties, mixed use properties, mobile home parks, nursing homes, hospitals, student housing properties, and more. Plus, CMBS portfolio loans are also available for larger businesses to refinance multiple properties while enjoying low interest rates and liberal cash-out restrictions.

In this article:
  1. How Commercial Mortgage Backed Securities Are Structured
  2. To learn more about CMBS loans, fill out the form below to speak to a conduit loan expert today!
  3. Related Questions
  4. Get Financing
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