CMBS Loans for Commercial Real Estate Acquisitions
In commercial real estate, you have some options when it comes to financing new acquisitions. Traditional loans can be cumbersome and carry high interest rates. For lower interest and many other advantages, it’s worth the time to check out Commercial Mortgage Backed Securities, or CMBS loans.
So, How Are They Structured?
Also known as “conduit loans,” CMBS loans are basically bundles of other loans. The originator of the loan securitizes this package and sells it to investors. The loan is then held in trust while it functions as collateral for the Mortgage Backed Security.
The liquidity provided by this loan is advantageous to real estate investors. Commercial property development requires working capital, so CMBS loans can be a good match for building or acquiring properties such as apartment complexes, industrial parks, shopping malls and office suites.
What Are the Benefits?
CMBS works for many entities because its financial structure offers benefits to both lender as well as borrower. This “win-win” scenario makes this type of loan popular for those looking to make real estate acquisitions.
The benefits for the borrower are low interest rates, non-recourse debt and typically fixed term, up to 10 years. Typically amortized over a period of 25 to 30 years, they could have a balloon payment at the end of the loan. Some also allow the ability to cash out. Thanks to the structure of commercial mortgages, many CMBS loans also carry less pre-payment risks.
A few of the more important benefits for lenders include diversification, improved liquidity, standardization and First Loss Subordinate Bond Structure. When large pools of loans are grouped together, they come from various geographic markets and vary greatly by product type. This means the default risk in any one sector is limited. Loan originators are, in turn, able to reduce their share of loss exposure. This saves money.
Securitization of these loans enables investors to purchase low-balance bonds with various maturities and payment structures, thereby improving liquidity. The standardization of reporting, practices and loan documents ensures smoother operations that are similar throughout the industry. Due to the seamless nature of this practice, servicing and securitization costs are lower.
First Loss Subordinate Bond Structure places the responsibility of portfolio losses on subordinate bondholders first. This prevents lenders from issuing high-risk mortgages since buyers will not accept mortgages that do not meet their credit requirements.
Some requirements of CMBS loans, such as yield maintenance or defeasance, appear to be disadvantages at the onset, but these policies create benefits on the bond side of the loan that allows for lower costs.