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Last updated on Dec 2, 2022
3 min read

CMBS & Conduit Loans For Commercial Real Estate Financing

A conduit loan is a type of commercial real estate loan that is secured by a first-position mortgage on a commercial property, which is then bundled with other loans and sold on the secondary market.

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In this article:
  1. CMBS Loan Basics
  2. What Is a CMBS Loan?
  3. Who Uses CMBS Loans?
  4. How Does a CMBS Loan Work?
  5. How Are CMBS Interest Rates Determined?
  6. Get Financing

CMBS Loan Basics

Commercial real estate investors have a plethora of loan options to consider before choosing the right source. One of the most popular investment options is a CMBS loan. CMBS loans, also known as conduit loans, allow commercial real estate investors an opportunity to finance commercial properties of all sizes; with loans starting as low as $2 million.

Despite having been around since the 1900s, many investors are unfamiliar with what conduit loans are and how they work. This is especially true when working with small banks, as most simply do not offer CMBS loans.

For a complete understanding of this type of loan, we'll start by examining what a CMBS loan is and then how this type of financing works.

What Is a CMBS Loan?

A conduit loan is a type of commercial real estate loan that is secured by a first-position mortgage on a commercial property's capital stack. Typically packaged, pooled, and sold by conduit lenders, investment banks, commercial banks or a syndicate of banks, CMBS loans are ideal for CRE investors. These loans are held in a separate trust to serve as collateral for a mortgage-backed security. Borrowers who are looking for higher leverage with lowered fixed-rates often prefer conduit loans over traditional commercial mortgage loans as there tends to be a good deal less red tape.

CMBS loans are generally non-recourse with standard bad-boy carve-outs. Most CMBS loans have a fixed interest rate amortized over a 25-30 year time period, however some offer as little as a 10 -ear amortization. A balloon payment is often required at the end of the term.

Who Uses CMBS Loans?

CMBS loans or conduit loans are available for income-producing properties. These would include multifamily properties, self-storage facilities, hotels, industrial buildings, retail properties, and office buildings. Any company seeking to invest in commercial real estate can use — and should consider — CMBS loans as an option for their funding if they are seeking 75% or less leverage and have a loan request of at least $2 million.

How Does a CMBS Loan Work?

One of the greatest advantages of CMBS loans are their flexible underwriting guidelines. Most traditional loans place great scrutiny on borrowers, often times limiting what is possible. CMBS loans, on the other hand, are readily available to new commercial property investors. Investors that cannot meet the strict conventional liquidity and possible net worth minimums can opt for a CMBS loan and receive the funding they need without all the red tape — quite often with superior rates and terms.

Thanks to the ease with which investors can access capital through CMBS loans, they are on the rise once again for commercial lenders. The lower, fixed interest rates also contribute to their appeal. For better return on investment without the scrutiny of traditional loans many commercial real estate investors are considering conduit loans for their next investment or recapitalization of existing investments.

How Are CMBS Interest Rates Determined?

First of all, as earlier mentioned, most CMBS loans use fixed interest rates. This benefits borrowers, but it also provides stable, projectable income for investors who have purchased the mortgage-backed securities. While there are floating-rate CMBS loans out there, they are relatively uncommon.

The actual interest rate on your loan will generally be based on current U.S. Treasury swap rates. This often is lower for CMBS loans than for traditional commercial property mortgages.

In this article:
  1. CMBS Loan Basics
  2. What Is a CMBS Loan?
  3. Who Uses CMBS Loans?
  4. How Does a CMBS Loan Work?
  5. How Are CMBS Interest Rates Determined?
  6. Get Financing

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