What is a Conduit Loan?
Conduit loans, also known as CMBS loans, are commercial real estate loans that are pooled together with similar commercial mortgages and sold on the secondary market. CMBS loans are known for their relaxed credit requirements, but are only available for income-generating properties, and cannot typically be used as land or construction loans.
CMBS Loans Explained
Conduit loans, also known as CMBS loans, are commercial real estate loans that are pooled together with similar commercial mortgages and sold on the secondary market. CMBS loans are known for their relaxed credit requirements, but are only available for income-generating properties, and cannot typically be used as land or construction loans.
On the secondary market, conduit loans are divided into tranches— different groups based on risk, return, and loan maturity. Risker loans with longer terms and higher interest rates will likely be sold to higher risk investors, like hedge funds, while lower risk investors, such as pension funds, are more likely to go with lower-risk tranches.
Current CMBS Loan Terms
CMBS Loan Features, Rates, and Prepayment Penalties
In general, CMBS loans non-recourse, fixed-rate, and fully assumable, giving them a lot of benefits for potential borrowers. In addition, conduit loan interest rates are generally competitive, and are based on U.S. Treasury rates plus a margin, or spread. This spread is determined by a several factors, including property quality and condition, quality of management, quality of tenants, and property cash flow, as determined by debt service coverage ratio, or DSCR.
Unlike many commercial property loans, conduit loan borrowers will often have to pay defeasance in order to prepay their loan. Defeasance involves a borrower purchasing an equivalent number of substitute bonds, usually U.S. Treasury bonds, but sometimes Fannie Mae or Freddie Mac securities, in order to replace the income provided by their loan. Other CMBS loans allow yield maintenance, the payment of a specific percentage of the loan, as a prepayment penalty.
CMBS Loan Benefits
Because of their relaxed credit requirements, CMBS loans are often the preferred option for borrowers who have weaker credit ratings or who may not qualify for traditional loans. In addition, because of their non-recourse nature, the borrower’s personal assets are not at risk in the event of default. Furthermore, CMBS loans are assumable, meaning that the loan can be transferred from one borrower to another without the need for additional underwriting or pre-payment fees. This can be a great benefit for the borrower, as it gives them the ability to easily transfer their loan for a variety of reasons, such as sale of the property or the desire to capitalize on current interest rates.
Finally, CMBS loans are also attractive because they are a very liquid asset. By pooling together large numbers of loans and selling them on the secondary market, lenders are able to create a high demand for CMBS loans, which gives borrowers the ability to easily refinance or sell their loan if they need to.
CMBS loans are a great option for borrowers who are looking for a commercial loan with relaxed credit requirements and competitive interest rates. With their non-recourse nature and ability to be transferred without penalty, CMBS loans can be a great option for borrowers looking to get the best deal on their commercial real estate loan.
Related Questions
What are some of the benefits of conduit loans?
- In general, CMBS loans are non-recourse, fixed-rate, and fully assumable, giving them a lot of benefits for potential borrowers. Additionally, conduit loan interest rates can be competitive, typically set at a spread above the 10-year swap rate.Learn more →
What is the difference between a conduit loan and a traditional commercial real estate loan?
A conduit loan, also known as a CMBS loan, is a commercial real estate loan which is secured by a mortgage on a commercial property. These loans are structured by conduit lenders, commercial banks or investment banks. A conduit loan consists of commercial real estate first mortgage debt, which is pooled together and held in a trust. The commercial loans are single loans of varying property types, loan sizes, and locations. The trust then releases a series of bonds of varying yield, duration, and payment priority. Investors choose which bond they would like to purchase based on their appetite for risk, yield, and duration. Pooling together single loans makes them more attractive to investors. It also allows investors to enter the commercial mortgage market. This increases the amount of available funding for commercial mortgage loans, and forces mortgage loans to be aggressively priced.
A traditional commercial real estate loan is a loan that is secured by a mortgage on a commercial property. These loans are typically structured by banks or other financial institutions. Traditional commercial real estate loans are typically single loans of varying property types, loan sizes, and locations. The loan is typically structured with a fixed interest rate and a fixed repayment term. The loan is typically secured by a mortgage on the property, and the loan is typically repaid in full at the end of the loan term.
What are the advantages of a conduit loan for commercial real estate financing?
The advantages of conduit loans for commercial real estate financing include flexible underwriting guidelines, lower fixed interest rates, access to capital without the scrutiny of traditional loans, leverage up to 75%, and rates as low as 4.30%. Conduit loans are also typically fixed-rate and fully assumable, so a borrower won’t have to worry about rates fluctuating during the life of their loan.
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What types of properties are eligible for a conduit loan?
Conduit loans are available for a variety of property types, including multifamily properties, apartment buildings, office buildings, hotels, retail, industrial, and self-storage properties. These loans are also available to more ‘exotic’ or unconventional property types, such as marinas, parking garages, or healthcare facilities.
What are the requirements for obtaining a conduit loan?
Conduit lenders typically require borrowers to have a minimum net worth and a minimum debt service coverage ratio (DSCR). The maximum loan-to-value (LTV) ratio is usually 75%, and the loan term is usually a 10-year fixed-rate. Prepayment options are generally defeasance or yield maintenance.
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What are the typical terms and conditions of a conduit 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.