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.