CMBS Loans for Owner-Occupied Commercial Real Estate
In general, CMBS loans are not available for owner-occupied commercial real estate. Instead, businesses usually need to get a bank loan or an SBA loan if they want to purchase a building that they will occupy. However, in certain situations, larger businesses may be able to utilize conduit financing to purchase an owner-occupied commercial property.
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In most circumstances, owner-occupied conduit loans are only available for properties that are partially owner-occupied. For example, if mid-size or larger business purchases a property and only uses a certain portion of it, say 50-60%, and decides to rent out the remaining portion to a tenant with great credit, the property could be CMBS-eligible.
Owned-Occupied CMBS Loans Have Stricter Lending Requirements
If only part of the building is owner occupied, the remaining barrier to conduit financing remains the financial strength of the company itself. Since owned-occupied CMBS loans are significantly riskier for lenders, they will most likely want to take a look at the borrower’s credit score and see audited tax and income statements for the last several years. Companies with growing revenues, strong profits, and low amounts of debt are generally good candidates. In general, lenders are more likely to approve of owner-occupied CMBS refinancing, and somewhat less likely to approve of the acquisition of a property that the borrower plans to occupy in the future.
If the lender decides to approve the borrower, the borrower will most likely have to form a separate entity (if they have not already done so), in order to lease the property back to themselves. In many cases, the borrower will sign a long-term “synthetic lease” with the building-owning entity. Just as with other conduit loans, this entity must typically be a bankruptcy-remote special purpose entity (SPE), in order to reduce risks for both the borrower and the lender.
Related Questions
What are the benefits of CMBS loans for owner-occupied commercial real estate?
CMBS loans for owner-occupied commercial real estate offer several benefits, including lower interest rates, longer loan terms, and more flexible repayment options. Additionally, CMBS loans typically require less paperwork and have fewer restrictions than SBA 504 loans. However, CMBS loans for owner-occupied properties may require a higher credit score and more detailed financial information than other CMBS loans.
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What are the requirements for obtaining a CMBS loan for owner-occupied commercial real estate?
In order to obtain a CMBS loan for owner-occupied commercial real estate, lenders will typically want to take a look at the borrower’s credit score and see audited tax and income statements for the last several years. Companies with growing revenues, strong profits, and low amounts of debt are generally good candidates. In addition, the borrower will most likely have to form a separate entity (if they have not already done so), in order to lease the property back to themselves. This entity must typically be a bankruptcy-remote special purpose entity (SPE), in order to reduce risks for both the borrower and the lender.
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.
What are the advantages of CMBS loans over traditional bank loans for owner-occupied commercial real estate?
CMBS loans offer several advantages over traditional bank loans for owner-occupied commercial real estate. First, CMBS loans typically have lower down payment requirements than bank loans, often as low as 25%. This makes them more accessible to borrowers who may not have the cash to put down a larger down payment. Second, CMBS loans are usually more competitively priced than bank loans, and may offer better terms. Third, CMBS loans are not as reliant on a borrower's credit score, net worth, and commercial real estate experience as bank loans, making them more accessible to borrowers who may not have a long history in the industry. Finally, CMBS loans are not held on the lender's balance sheet, meaning that the borrower will not have to deal with the same lender throughout the life of the loan. Instead, they will have to work with a loan servicer, referred to as a master servicer.
What are the risks associated with CMBS loans for owner-occupied commercial real estate?
CMBS loans for owner-occupied commercial real estate have stricter lending requirements than other CMBS loans. This means that lenders will take a closer look at a company's financials, such as credit score, audited tax and income statements, and the amount of debt the company has. Additionally, borrowers may have to form a separate entity to lease the property back to themselves, and sign a long-term “synthetic lease” with the building-owning entity. This entity must typically be a bankruptcy-remote special purpose entity (SPE), in order to reduce risks for both the borrower and the lender.
Other risks associated with CMBS loans include tough prepayment penalties, which borrowers should keep in mind. Additionally, CMBS loans are non-recourse, meaning that the lender cannot pursue the borrower for any additional funds if the loan goes into default.
What are the best practices for negotiating a CMBS loan for owner-occupied commercial real estate?
The best practices for negotiating a CMBS loan for owner-occupied commercial real estate include having a strong credit score, audited tax and income statements for the last several years, and forming a separate entity (if not already done) to lease the property back to the borrower. Additionally, lenders are more likely to approve of owner-occupied CMBS refinancing, and somewhat less likely to approve of the acquisition of a property that the borrower plans to occupy in the future. Borrowers may also be able to occupy as much as 60% of a building, as long as they rent the remaining 40% out to a similarly qualified tenant with a long-term lease. Source
In addition to the above, CMBS loans typically offer non-recourse, competitive rates for long-term financing, relatively high leverage, flexible loan sizes, cash-out refinancing options, borrowers with credit and legal issues may qualify, and relatively relaxed borrower net worth requirements. Mezzanine financing and preferred equity may also be arranged in some scenarios. Source