CMBS loans are backed by large commercial loans, referred to as CMBS or conduit loans, while RMBS are backed by residential mortgages, generally for single family homes. Residential mortgage backed securities may be backed by a variety of different kinds of residential loan products, such as home equity loans, as well as FHA loans. CMBS loans are limited to being backed by loans on income-producing commercial properties, such as retail centers, hotels, office buildings, and apartment buildings. Less commonly, CMBS loans are issued to other income-producing properties like parking garages and marinas.

Both CMBS and RMBS are structured into different tranches, or sections, based on the risk of the loans. The highest tranches get paid off first in the case of a loan default, while lower tranches will get paid off later (or not get paid off at all), should the borrowers fail to pay back their loans.

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.

CMBS loans have several advantages, including flexible underwriting guidelines, fixed-rate financing, full assumability, and the potential for lenders and bondholders to achieve a higher yield on investments. Investors can also choose which tranche to purchase, allowing them to work within their own risk profiles. Additionally, CMBS 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). Finally, 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.

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CMBS loans can be used to finance a variety of commercial real estate properties, including retail, office, and mixed-use properties. Retail properties are generally preferred by CMBS lenders, as they tend to have strong, long-term anchor tenants and are managed by experienced organizations. Office assets are also popular in the CMBS loan market, and can be used for the acquisition, cash-out, or rate and term refinancing of Class A and Class B office properties. Mixed-use properties have also become increasingly popular in recent years, and CMBS loans can be used to finance a wide selection of these properties, ranging from small apartment buildings with a few commercial tenants to larger complexes with living spaces and retail stores, restaurants, or entertainment businesses.

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.

Unlike borrowers for commercial bank loans, CMBS borrowers will not continue to deal with the same lender that originated their loan during the remainder of its life; instead, they will have to work with a loan servicer, referred to as a master servicer. If a borrower defaults on their loan, they will have to work with another type of servicer, known as a special servicer. This is not always ideal, as a special servicer will generally put the investor’s needs (and their interests) above the needs of the borrower.

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.

To summarize, the requirements for obtaining a CMBS loan are:

• DSCR and LTV
• Debt yield
• Net worth of at least 25% of the entire loan amount
• Liquidity of at least 5% of the loan amount
• Third-party reports, such as a full appraisal and Phase I Environmental Assessment
• Check into a borrower’s credit history, net worth, and commercial real estate experience