CMBS Loans Explained: What is a CMBS Loan?

What are CMBS Loans for Commercial Properties?

CMBS loans, which are also referred to as conduit loans, are a type of real estate loan that’s secured by a first position mortgage on a commercial property. CMBS loans are typically offered by commercial banks, conduit lenders, or investment banks, and, once they are issued, they are packaged and sold to other investors. Due to that fact that banks do not hold CMBS loans on their balance sheets, they can offer these loans to borrowers at relatively low fixed interest rates, and can also offer borrowers relatively high leverage.

What are the Common Features of CMBS Loans?

In addition to generally having fixed-interest rates, CMBS loans typically have terms of 5-10 years, with amortizations of between 25 and 30 years. Plus, CMBS loans are usually non-recourse and fully assumable. This means that, in most cases, a lender cannot go after a borrower’s personal property in the case of a loan default, and, that the borrower can pass on the CMBS loan to a new borrower should they want to sell their property.

What Borrowers are Eligible for Conduit Loans?

In general, lenders look at two major factors, DSCR and LTV, when deciding if a borrower is eligible for a conduit loan. LTV, or loan-to-value ratio, is determined by dividing the loan amount by the appraised value of the commercial property, while DSCR is determined by the net operating income by the total debt service of the property. Most borrowers will accept properties with a maximum LTV of 75% and a DSCR of 1.25 to 1.35x. Lenders also look at a property’s debt yield, which can be determined by taking a property’s net operating income, dividing it by the loan amount, and multiplying it by 100. CMBS lenders typically prefer properties with a debt yield of 7% or more.