Fannie Mae

Freddie Mac

How CMBS Loan Spreads are Determined

CMBS loan spreads, also known as credit spreads, are usually determined by factors including:

• Leverage/Loan-to-value (LTV): CMBS lenders typically allow LTVs of up to 75% (and some even permit 80%), however, properties with lower LTVs can often benefit from a smaller spread, and therefore, a lower interest rate.

• Property location: Since loan spreads are tied to risk, properties in more desirable, higher traffic locations are less likely to default, and can therefore command reduced interest rates.

• Tenant strength: For retail and office properties, tenant strength is key. For example, a power center anchored by a Walmart with a 20-year credit tenant lease can usually get a much lower interest rate than a similar shopping center occupied by a lesser-known regional grocery store.

• Loan term: Longer-term loans are typically riskier for investors, so, in most cases, as the term of a CMBS loan goes up, so does the interest rate.

• Loan size: With traditional commercial mortgages, larger loans equate to lower interest rates, and, while the same typically goes for CMBS loans, lender policies can vary.

• Lease terms: In general, CMBS lenders prefer that office or retail properties with multiple tenants have staggered leases to reduce risk. In the case of shopping centers or malls with a large anchor client, (including credit tenant lease scenarios) lenders often require that the term of the lease is longer than the term of the CMBS loan.

• Asset class/asset type: Certain asset classes, like hotels, are generally far riskier than office or apartment buildings in top-tier markets, and, just like for other factors, higher risk equals a higher interest rate.

• Property cash flow (DSCR): Most CMBS lenders require a minimum of 1.25x DSCR for most property types, with a minimum of 1.40x or 1.50x for riskier assets, such as hotels. As one might expect, the higher the DSCR, the less risky the loan, and the lower the potential interest rate that the borrower is likely to be offered.

• Asset quality/condition: Just like properties in great location, recently built, high-quality properties (usually Class A assets) can command significantly lower interest rates than lower-quality properties.

• Economic conditions: In times of greater economic risk, CMBS lenders will want to hedge their bets by increasing the interest rate, while in times of stability, lenders will be more likely to reduce interest rates to attract more borrowers and increase overall loan volume.

Related Questions

What are the advantages of CMBS loans?

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.

What are the disadvantages of CMBS loans?

The major disadvantages of CMBS loans include:

• 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.
• 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.

Source 1
Source 2
Source 3


What are the eligibility requirements for CMBS loans?

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. Additionally, lenders 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.

In order for investors to work around the fact that CMBS financing is generally not available for owner-occupied properties, a real estate firm or similar entity would have to take out the CMBS loan on the property, and then lease it to the owners of the hospital or healthcare firm.

When it comes to longer-term, fixed-rate financing for stable retail properties, CMBS lenders generally prefer retail assets with strong, long-term anchor tenants as well as properties managed by experienced organizations.

What are the typical terms of a CMBS loan?

CMBS loans are generally offered in 5, 7, or 10-year terms, with 15-year terms occasionally being offered in exceptional circumstances. 25-30 year amortizations are generally used, with partial and full term interest-only options often available. Conduit financing generally allows LTVs up to 75%, but 80% may be allowed in certain cases, with LTVs even higher if the senior conduit loan is combined with mezzanine debt. CMBS loans are typically fixed-rate, though floating-rate CMBS financing does exist. Conduit loans commonly begin at $2 million, though some lenders will go as low as $1 million. On the other end of the spectrum, the largest CMBS loans can be more than $1 billion.

What are the current CMBS loan interest rates?

The current CMBS loan interest rates are based on current U.S. Treasury swap rates. According to cmbs.loans/commercial-mortgage-calculator, the current rates are:

Loan Type	Interest Rate
CMBS	Fixed

For more information on CMBS loan rates, please see this article.