Conduit loans are commercial real estate loans that are pooled together with similar commercial mortgages and sold on the secondary market. They are known for their relaxed credit requirements, but are only available for income-generating properties, and cannot typically be used as land or construction loans.

Fusion CMBS loans, on the other hand, combine a large amount of smaller CMBS loans with bigger, investment grade loans during the securitization process. This is designed to reduce overall risks for lenders, as larger loan borrowers are much less likely to default. For example, a fusion CMBS transaction might have 50 smaller loans of $5-15 million each, combined with a large loan of $100 million or more. In contrast, a traditional CMBS securitization might involve around 100 smaller loans, each which would make up no more than 5% of the entire securitization amount.

In general, the trend toward fusion CMBS loans is more of concern to CMBS investors, rather than borrowers. However, fusion CMBS lending does make it somewhat easier for borrowers to acquire extremely large CMBS loans, which could make it a positive for large companies whom wish to use conduit financing for commercial real estate.

The advantages of conduit loans for commercial real estate financing include flexible underwriting guidelines, lower fixed interest rates, access to capital without the scrutiny of traditional loans, leverage up to 75%, and rates as low as 4.30%. Conduit loans are also typically fixed-rate and fully assumable, so a borrower won’t have to worry about rates fluctuating during the life of their loan.

Sources:

• CMBS & Conduit Loans For Commercial Real Estate Financing
• Apartment Loans
• The Pros and Cons of CMBS Loans: A Guide

Fusion CMBS loans offer a number of advantages for commercial real estate financing. These include:

• Reduced overall risks for lenders, as larger loan borrowers are much less likely to default.
• Easier for borrowers to acquire extremely large CMBS loans.
• Flexible underwriting guidelines.
• Fixed-rate financing.
• Fully assumable.
• Lenders and bondholders can potentially achieve a higher yield on investments.
• Investors can choose which tranche to purchase, allowing them to work within their own risk profiles.
• Non-recourse.
• Attractive fixed rates for long term loans.
• Can go up to 75% LTV.
• Wide range of loan sizes.
• Will consider non-Class “A” assets.
• Less scrutiny for borrowers.
• Provides cash out refinancing.
• Loans are fully assumable.
• Can be combined with mezzanine debt or preferred equity in many scenarios.

The risks associated with conduit loans for commercial real estate financing include not receiving a great servicing experience, as CMBS lenders don't typically service these loans themselves. Additionally, borrowers may be required to conduct either yield maintenance or defeasance in order to repay their loan. Furthermore, borrowers who have trouble repaying their loans are unlikely to get any form of forbearance or foreclosure/default prevention assistance, and may default on the loan relatively quickly.

Source: The Pros and Cons of CMBS Loans: A Guide

The risks associated with Fusion CMBS loans for commercial real estate financing include:

• Not serviced by initial CMBS lender
• Strict enforcement of prepayment penalties
• Higher closing costs
• Dishonest tranche ratings can have serious negative effects for borrowers and investors
• Less autonomy in the operation of the property and limited flexibility to deviate from the terms of the loan documents.
• Difficulty in releasing collateral.
• Expensive to exit.
• Lock outs often prevent prepayment or up to two years.
• Reserves required.
• Secondary financing (i.e. mezzanine debt or preferred equity) not always allowed.

Sources:

• cmbs.loans/blog/conduit-vs-fusion-cmbs
• apartment.loans/posts/cmbs-explained
• www.multifamily.loans/multifamily-cmbs-loans