A CMBS B-Piece loan is a type of commercial mortgage-backed security (CMBS) that is divided into two categories; investment grade securities (AAA/Aaa through BBB-/Baa3) and sub-investment grade securities (BB+/Ba1 through B-/B3). B-piece bondholders must wait until all A-class bondholders are fully paid before they receive any compensation, but they receive higher returns when compared to A-rated CMBS. Furthermore, both A-class and B-piece CMBS are divided into multiple tranches themselves. CMBS risk-retention rules, stemming from the Dodd-Frank Act, mandate that CMBS lenders keep at least 5% of a loan on their books, and also require that B-piece buyers hold onto their investment for a minimum of 5 years.

The benefits of a CMBS B-Piece loan include higher returns for investors when compared to A-rated CMBS, as well as the potential for a quicker closing process. B-piece CMBS are typically sold to hedge funds and other investors who are willing to take on higher risk in exchange for higher returns. Additionally, since B-piece buyers are not required to hold onto their investment for a minimum of 5 years, as is the case with A-piece buyers, the closing process for CMBS B-Piece loans can be quicker.

The risks associated with a CMBS B-Piece loan are higher than those associated with A-rated CMBS. This is because B-piece bondholders must wait until all A-class bondholders are fully paid before they receive any compensation. Additionally, the Dodd-Frank Act mandates that B-piece CMBS investors keep their bonds for at least five years, meaning that traders and hedge funds can’t merely purchase these riskier securities to trade them later. This means that CMBS lenders have needed to uphold stricter underwriting standards than they did in past years (i.e., in the run-up to the 2008 financial crisis).

Sources:

• CMBS B-Pieces: What You Need to Know
• CMBS B-Pieces and The Multifamily and Commercial Lending Market

CMBS B-Piece loans differ from other commercial real estate loans in several ways. First, they are part of a larger pool of loans that are grouped together to create a commercial mortgage-backed security (CMBS). These securities are divided into two categories; investment grade securities (AAA/Aaa through BBB-/Baa3) and sub-investment grade securities (BB+/Ba1 through B-/B3). A-class bondholders are paid first, while B-piece bondholders must wait until all A-class bondholders are fully paid before they receive any compensation. Additionally, B-piece CMBS offer investors significantly higher returns when compared to A-rated CMBS. Finally, CMBS risk-retention rules, which stem from the Dodd-Frank Act, mandate that CMBS lenders keep at least 5% of a loan on their books, and also require that B-piece buyers hold onto their investment for a minimum of 5 years.

In order to obtain a CMBS B-Piece loan, borrowers must meet certain criteria. Generally, these criteria include:

• A minimum loan size of $10 million
• A minimum loan-to-value ratio of 65%
• A minimum debt service coverage ratio of 1.25x
• A minimum loan term of 5 years
• A minimum interest rate of 5.5%

Additionally, borrowers must meet the requirements of the CMBS risk-retention rules, which mandate that CMBS lenders keep at least 5% of a loan on their books, and also require that B-piece buyers hold onto their investment for a minimum of 5 years.

Sources:

• cmbs.loans/blog/what-is-a-cmbs-b-piece
• www.multifamily.loans/apartment-finance-blog/cmbs-b-pieces-and-the-multifamily-and-commercial-lending-market