The greatest benefit of an interest-only CMBS loan is that it conserves cash flow in the short term. This can be helpful if you are looking to reinvest that cash into other property acquisitions or improvements. Additionally, because you are only paying the interest on the loan, your monthly payments will be lower than if you were paying both principal and interest. This can free up additional cash flow each month.

It's important to note that interest-only CMBS loans have a significantly higher default rate than their amortizing cousins, so borrowers should make sure that they’ll be able to make their balloon payments— or plan carefully to refinance the loan when it reaches maturity.

The risks associated with an interest-only CMBS loan include a significantly higher default rate than amortizing loans, a balloon payment that is significantly larger if the loan doesn’t amortize at all throughout its term, and the potential for the borrower to be underwater on the loan if the property’s value decreases. Additionally, the borrower’s monthly payments could increase significantly at the end of the interest-only period when they are required to start paying both principal and interest. Before taking out an interest-only loan, be sure to speak with a qualified commercial real estate broker to discuss all of the risks and benefits associated with this type of financing.

Sources:

• cmbs.loans/blog/interest-only-cmbs-loans
• www.multifamily.loans/apartment-finance-blog/the-benefits-and-risks-of-interest-only-loans-in-commercial-real-estate

In order to obtain an interest-only CMBS loan, lenders typically look at two major metrics: DSCR and LTV. Additionally, lenders will look at debt yield, which is determined by taking the net operating income of a property and dividing it by the total loan amount. Borrowers are also typically required 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.

Sources:

• Interest-Only CMBS Loans
• Multifamily CMBS Loans

Interest-only CMBS loans can be beneficial to borrowers because they increase property cash flow and can help to qualify for a larger loan. Interest-only CMBS loans also have a lower monthly payment than a fully amortizing loan, which can be beneficial for borrowers who want to maximize cash flow during the duration of the loan term. However, it is important to note that interest-only CMBS loans have a significantly higher default rate than their amortizing cousins, so borrowers should make sure that they’ll be able to make their balloon payments— or plan carefully to refinance the loan when it reaches maturity.

Interest-only CMBS loans are a variation of traditional CMBS loans, and they offer borrowers the ability to maximize cash flow during the duration of the loan term. With an interest-only loan, the borrower pays only the interest on the loan for the entire loan term, and the principal is due in a lump sum at the end of the loan term. This means that the borrower's monthly payments are lower than with a traditional CMBS loan, but the balloon payment at the end of the loan term is significantly larger. Interest-only CMBS loans also have a higher default rate than traditional CMBS loans, so borrowers should make sure they can make the balloon payment or plan to refinance the loan when it reaches maturity.

In contrast, traditional CMBS loans are fixed-rate, partially amortizing loans pooled together in a REMIC. The borrower pays both the interest and principal on the loan throughout the loan term, and the payments are spread out over the life of the loan. This means that the borrower's monthly payments are higher than with an interest-only loan, but the balloon payment at the end of the loan term is significantly smaller. Traditional CMBS loans also have a lower default rate than interest-only CMBS loans.