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.