Pooling and Servicing Agreements: What CMBS Borrowers Need to Know
A pooling and servicing agreement (PSA), is a contract that is required when loans, including CMBS loans, are pooled together and packaged into mortgage backed securities. For CMBS loan borrowers, this means that they must abide by both the terms of the loan agreement, and by the terms of their loan’s pooling and servicing agreement.
CMBS Servicing: What Borrowers Need to Know
Unlike traditional bank loans, CMBS loans are not serviced by the lenders that issue them. Instead, after conduit loans are securitized and sold as commercial mortgage backed securities, they are serviced by third-party companies. In general, borrowers do not have any say in the companies that service their loans; this is decided by the lender.
CMBS and REITs: What Commercial Borrowers Should Know
A real estate investment trust (REIT) is a firm that acquires, owns, and operates income-producing commercial real estate, or, in the case of mortgage REITs, commercial mortgages. REITs may be either publicly traded or non-traded, private REITs, depending on the individual company. CMBS loans and REITs have a complex relationship; on one hand, traditional REITs use CMBS loans to finance their property investments, while certain mortgage REITs originate or purchase commercial loans in order to generate profits for investors.
CMBS Default and Delinquency Rates: What Borrowers Should Know
While CMBS lenders’ underwriting standards are stricter than they once were, a certain amount of conduit loan borrowers still default on their loans. It’s generally understood that a loan default is something that borrowers want to avoid at all costs. However, understanding the CMBS default rates-- and, just as importantly, the reason why borrowers defaulted on their loans in the first place, can be essential for borrowers who want to avoid the same fate.
Can Trepp Provide Valuable Market Data for CMBS Borrowers?
Trepp is a data analytics and software company which provides information and insights about the CMBS and commercial real estate markets. While Trepp’s products are mainly targeted towards institutional bond investors, broker dealers, and hedge funds, their products can also be also be valuable for CMBS borrowers, as well as investors interested in acquiring properties that are currently being funded with CMBS loans (especially in the case of loan assumptions).
CMBS ETFs: How Do They Affect Borrowers?
An exchange-traded fund (ETF) is a fund comprised of securities that is regularly traded on major stock exchanges. CMBS ETFs are exchange-traded funds composed of commercial mortgage backed securities (CMBS). A commercial mortgage backed security generally consists of a pool of loans issued to income-producing commercial properties, such as apartment buildings, shopping centers, and hotels, that is placed in a trust, securitized, and sold to investors on the secondary market. Right now, the concept of CMBS ETFs is relatively new, so only one CMBS ETF is currently being actively traded, the iShares CMBS ETF.
What is a REMIC (Real Estate Mortgage Investment Conduit)?
A Real Estate Mortgage Investment Conduit, or REMIC, is an entity which is utilized to pool loans and issue mortgage backed securities (MBS), or commercial mortgage backed securities (CMBS). First authorized by the Tax Reform Act of 1986, REMICs can be organized in several different ways, including corporations, trusts, or partnerships.
The CMBS Origination Process: What Borrowers Need to Know
CMBS loan origination is the process in which a conduit lender analyzes a borrower’s commercial loan application, determines their suitability for financing, presents the terms to the borrower, and, if both parties agree, issues funds. In contrast to bank loans, the CMBS origination process can be somewhat complex, as each loan must meet specific credit standards in order to be securitized. In this process, a conduit loans are pooled with other loans and sold to investors as commercial mortgage backed securities.
CMBS Primer: A Basic Guide to CMBS/Conduit Loans
CMBS loans, also referred to as conduit loans, are one of the most popular ways to finance commercial real estate in the United States. They are offered for almost all types of income-producing commercial properties, such as office buildings, shopping centers, apartment buildings, and hotels. When compared to other types of commercial property loans, CMBS loans have a variety of advantages and disadvantages. In this CMBS primer, we’ll discuss the differences between conduit loans and other types of commercial financing, and tell borrowers exactly what they need to know before deciding to take on CMBS debt.
ABS: Asset Backed Securities vs. CMBS: Commercial Mortgage Backed Securities
Asset backed securities (ABS) are financial securities backed by a pool of assets that produce income, generally loans. In the case of mortgage backed securities (MBS) and commercial mortgage backed securities (CMBS), the underlying assets are, respectively, residential and commercial mortgages. However, unlike MBS, asset backed securities are backed by non-mortgage loans, including auto loans, student loans, credit card debt, and variety of other types of debt.
Why CMBS Risk Retention Rules Are Reducing The Amount of Conduit Lenders
While conduit loan issuances have risen steeply in the last few years, the amount of lenders has actually fallen slightly— and experts believe that’s a direct result of a new federal risk retention rule that took effect in Dec. 2016. Before the market crash of 2008, the CMBS market was incredibly hot, and lenders were quite liberal with who they provided loans to— especially because they knew they could transfer 100% of the risk to CMBS bondholders.
What is a Master Servicer?
Since CMBS loans are pooled together, packaged into commercial mortgage backed securities, and sold to investors, they are not generally serviced by the lender that originated the loan. Instead, conduit loans are typically serviced by a third-party servicer, referred to as a master servicer.
What is a CMBX Index?
CMBX indexes track the market for CMBS (commercial mortgage backed securities), securities that themselves are backed by CMBS loans. CMBX indexes are an invaluable tool for investors who want to invest in CMBS, but they can also reveal important trends for commercial real estate borrowers who are considering taking out CMBS financing.
CMBS News Updates: Spring 2019
In the first quarter of 2019, a variety of trends and events have impacted the state of CMBS and conduit financing in the United States. Looking back at the 2018 year, while overall commercial loan transaction volume was up, CMBS issuances fell approximately 12%, to just under $77 billion. Overall, CMBS delinquency rates rose slightly, and, experts believe that troubled retail properties, including shopping malls, may be in for additional trouble if they cannot find a lender willing to refinance their debt.
CMBS vs. RMBS: What You Need to Know
Mortgage backed securities (MBS) come in two main varieties; commercial mortgage backed securities (CMBS) and residential mortgage backed securities (RMBS). While CMBS are backed by large commercial loans, referred to as CMBS or conduit loans, 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.
What are CMBS Tranches?
Just like asset backed securities and mortgage backed securities (MBS), commercial mortgage backed securities (CMBS) are divided into tranches based on credit risk. The highest-rated, least risky loans will be placed in the highest tranches, while the lowest-rated, riskiest loans will be placed in the lowest tranches.
CMBS Structure: What You Need to Know
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.
Hotel PIPs: Funding a Property Improvement Plan with a CMBS Loan
If you own a branded hotel or hotel franchise, you may be interested in participating in your franchise’s property improvement plan (PIP). Property improvement plans are typically required in order to bring a hotel in line with the franchise’s latest design standards, and in some cases, are mandatory, especially if a franchisee wants to expand their hotel or purchase a new franchise location.
What is a CMBS B-Piece?
When CMBS loans are pooled together to create commercial mortgage backed securities, these securities vary in credit quality and payment priority. Typically, they are divided between investment grade securities, (AAA/Aaa through BBB-/Baa3) and sub-investment grade securities (BB+/Ba1 through B-/B3). While the A-class bondholders are paid first, B-piece bondholders must wait until all A-class bondholders are fully paid before they receive any compensation. Due to their higher risk, however, B-piece CMBS offer investors significantly higher returns when compared to A-rated CMBS.
What is a Special Servicer?
CMBS loans are pooled together, securitized and sold to investors on the secondary market. Therefore, they are not generally serviced by the original lender. Instead, they are generally serviced by a master servicer, a third-party company that handles payments and communicating with borrowers. However, if a CMBS loan goes into default, servicing will generally be switched to a special servicer, which will work to determine if the borrower can once again become current on their loan.
CMBS SASB: Single-Asset, Single-Borrower Conduit Loans
While the average CMBS, or commercial mortgage backed security, often consists of a pool of 50-100 loans, single-asset, single-borrower (SASB) conduit loans consist of one, large loan for a single property that is securitized and sold on the secondary market. These SASB loans are becoming an increasingly popular form of financing for the largest and most exclusive commercial properties.
Special Purpose Entities in Relation to CMBS Loans
If you’re considering taking out a CMBS loan for a commercial property, your lender will typically require you to form a special purpose entity, or SPE, that will own the property and will act as the legal borrowing entity. Specifically, the borrower must form a single-purpose, bankruptcy-remote SPE, a special purpose entity that is specifically designed to hold one asset and to prevent that asset from being involved in external bankruptcy proceedings.
CMBS Loans vs. Portfolio Loans: What's the Difference?
When it comes to commercial real estate lending, there are typically two major kinds of loans, CMBS loans, also known as conduit loans, and portfolio loans. Conduit loans and portfolio loans have several key differences— and borrowers should be aware of them before deciding which type of commercial real estate financing best fits their individual needs.
Conduit Lenders List: The Largest Conduit Lenders of 2018
While in an earlier article, we looked at the top CMBS lenders of 2017, we’ll now take a look at some more recent data. As of the first quarter of 2018, the top conduit lenders included JP Morgan Chase Bank, Deutsche Bank, and Goldman Sachs, each which issued more than $3 billion of conduit loans during this time.
CMBS vs. SBA 504 Loans
CMBS loans and SBA 504 loans are two incredibly popular forms of commercial real estate financing, but they have several important differences. CMBS loans, also known as conduit loans, are issued by lenders, pooled with other similar loans, and then sold on the secondary market. In comparison, SBA 504 loans, which are guaranteed by the Small Business Administration (SBA), are 50% financed by a lender, and 40% financed by a Certified Development Company (CDC), a local non-profit group intended to increase economic development in a specific area.
CMBS vs. Life Company Loans
When it comes to commercial real estate lending, there are typically two major kinds of loans, CMBS loans, also known as conduit loans, and portfolio loans. Conduit loans and portfolio loans have several key differences— and borrowers should be aware of them before deciding which type of commercial real estate financing best fits their individual needs.
Yield Maintenance in Relation to CMBS Loans
While many conduit loans require that borrowers engage in defeasance if they want to prepay their loan, some lenders permit borrowers to prepay using yield maintenance. Yield maintenance involves a borrower paying off the balance of their CMBS loan, plus an additional 1-3% fee in order to compensate the lender for the income they’ve lost as a result of loan prepayment.
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.
Lockouts in Relation to CMBS Loans
For borrowers, prepayment penalties can be one of the most challenging aspects of CMBS loans. In addition to prepayment penalties, however, most conduit loans have a lockout period, a period of time in which the loan cannot be prepaid at all.
Defeasance Definition: How Defeasance Relates to CMBS Loans
Borrowers often consider conduit loans’ strict prepayment penalties to be one of their major downsides. Many CMBS loans must be prepaid in a process called defeasance, which involves a borrower purchasing alternative securities, often U.S. Treasury bonds, to replace the collateral and interest income that the lender will lose as a result of prepayment. Defeasance can be a complicated process, the details of which will typically be spelled out in a borrower’s loan agreement.
Conduit Loans vs. Fusion CMBS
Unlike traditional conduit loans, fusion CMBS transactions combine a large amount of smaller CMBS loans with bigger, investment grade loans. This is designed to reduce overall risks for lenders, as larger loan borrowers are much less likely to default.
The CMBS Loan Securitization Process
The CMBS securitization process involves a lender taking a variety of conduit loans, often up to 100 at a time, pooling them together, and selling them as bonds. Typical conduit lenders usually have between 3 and 8 securitizations each year.
Debt Yield in Relation to CMBS Loans
When it comes to CMBS loan underwriting, DSCR and LTV aren’t the only factors that a lender considers. Increasing, lenders are looking at a another metric, debt yield, in order to determine whether it’s truly worth approving a borrower for a conduit loan. Debt yield can be determined by taking a property’s net operating income (NOI), dividing it by the loan amount, and multiplying it by 100.
Are CMBS Loans Fixed-Rate?
The vast majority of CMBS loans are fixed-rate, however, floating-rate CMBS loans do exist. Despite that, variable-rate CMBS loans are considerably less popular than their fixed-rate counterparts, due to the fact that these loans have historically had particularly high default rates.
Refinancing CMBS Loans: What You Need to Know
Since the vast majority of CMBS loans are not fully amortizing, CMBS borrowers typically face hefty balloon payments when the term of their loan is up. If you’re a CMBS borrower who’s about to face a big balloon payment, refinancing your loan is often the best solution. And, when it comes to refinancing, you have a variety of options.
Buydowns in Relation to CMBS Loans
If you’re a CMBS loan borrower who wants to decrease the interest rate of your loan, you may be able to do so by purchasing an interest rate buydown.
Rate Locks in Relation to CMBS Loans
Unlike other types of large real estate loans, getting an early or extended rate lock on a CMBS loan is pretty much unheard of. However, many lenders do offer 30-day rate locks on certain CMBS loans in order to make their loan products more attractive to potential borrowers.
Debt Service Coverage Ratio (DSCR) in Relation to CMBS Loans
Debt Service Coverage Ratio, or DSCR, is one of the key metrics that lenders use when determining a borrower’s eligibility for a CMBS loan. DSCR can be calculated by dividing a property’s net operating income (NOI), with its annual debt service (including principal, interest, taxes, and related costs).
CMBS Loans and Cash-out Refinancing
The fact the CMBS loans have little to no cash-out restrictions makes them incredibly popular among commercial property owners who want to extract some of the equity from their property. Borrowers are typically only limited by the loan’s maximum LTV requirements— usually 75% for most CMBS loans.
Are CMBS Loans Assumable?
In most cases, CMBS loans are fully assumable, though a small fee must often be paid. This is a huge advantage for CMBS borrowers, since one of the main disadvantages of CMBS financing is the difficulty of exiting the loan early.
Are CMBS Loans Non-Recourse?
Fortunately for borrowers, the vast majority of CMBS loans are non-recourse. This means that if a borrower defaults on their loan, the lender cannot attempt to repossess their property in order to get compensation for their loss.
Loan-to-Value Ratio (LTV) in Relation to CMBS Loans
Loan-to-value ratio, or LTV, is one of the most important metrics that lenders use to determine whether a borrower can qualify for CMBS loan. LTV can be determined by dividing the amount of the loan by the assessed value of the property.
CMBS Loans vs. Agency Loans for Multifamily Financing
When it comes to getting financing for a multifamily property, Fannie Mae and Freddie Mac multifamily loans, also known as agency loans, are some of the most popular options on the market. When compared with CMBS financing, these agency loans have a variety of similarities and differences. Both agency and CMBS are typically non-recourse and fully assumable, and offer highly competitive interest rates. However, agency loans usually offer even lower rates than CMBS, with rates starting at 3.75-3.9%.