CMBS loans, or commercial mortgage-backed securities, have proved to be extremely popular forms of real estate financing in recent years. These loans are generally used to finance stabilized properties that property owners are set on holding for five years or longer. After a CMBS loan is closed, the loan originator pools it together with other loans and securitizes the group. These loans are secured by a first-position mortgage, or a primary lien on the property that secures the mortgage. This financing approach is well-fit for stabilized office, industrial, retail, hospitality, or multifamily assets. When compared to other types of loans, the fixed interest rate is lower, and the leverage is higher. With CMBS loans, the investor is not responsible for the full loan amount in case of default. Due to these attributes, CMBS loans are much more strictly regulated than loans from banks or insurance companies.
CMBS lenders pool a large number of mortgages into a single security and then re-sell pieces of the security to the public market. Since the security is in the public market, there must be strict regulation on the structure of the loan. Post-securitization, a master servicer takes over the remaining responsibility of the loan servicing; this is who the borrower stays in contact with for the remaining period of the loan. CMBS loans are leveraged as a tool for financing commercial properties: they allow lenient credit requirements and typically have fixed-rate terms of 5, 7, or 10 years.
TrueRate can help secure some of the best rates and best terms on the market for your deal, understanding the intricacies of a complex CMBS financing process and offering you the best rates on the market for your investment.
Most property types are eligible for CMBS loans, including:
CMBS Loans can be used for the purchase or refinance of commercial properties such as hotels, industrial, office, multifamily, mixed use and self-storage. This loan option is popular among commercial real estate investors because of the characteristic of off-loading the loan’s risk into a mortgage-backed security within the secondary market. For comparison, agency loan executions such as Fannie Mae or Freddie Mac are guaranteed by the federal government. On the other hand, CMBS loans are guaranteed by public investors who can hedge the risk of one specific property by buying into a pool of similar properties and deals. CMBS loans are also a popular choice for many borrowers seeking non-recourse loans, meaning the lender cannot go after the borrowers' assets in order to pay off the full loan balance. With that feature, CMBS loans have become popular with those that are having a difficult time receiving funding as a new investor. With large prepayment penalties, these loan types are also popular with investors that know they are holding an asset for a long time, specifically for at least five years.
CMBS Loans are secured by a first position mortgage on a commercial real estate property. These loans are packaged together, placed into a real estate mortgage investment conduit trust (REMIC) and then resold to investors on the secondary market. These loan structures have forgiving underwriting parameters, resting primarily on the debt service coverage ratio and the loan-to-value. These parameters make CMBS loans a popular investment tool with commercial real estate investors: even if a borrower does not meet the typical liquidity and net worth requirements of a bank, they may be able to receive CMBS financing. Once this financing is received, everything moving forward takes place with a master servicer. This is a third party that will collect the payments and communicate with the borrower.
Many CMBS loans have long prepayment lockout windows where the borrower is unable to prepay the loan in order to sell or refinance the property during that time. When this period is over, there are still often large penalties that are associated with prepaying a CMBS loan before the maturity date. Investors who have bought into the security on the secondary market expect a fixed rate of return during their investment, so without these additional prepayment regulations, they are unable to guarantee the returns that they signed on for. Therefore, prepayment penalties often include payment structures such as yield maintenance or defeasance. Prepayment penalties are a core factor that borrowers must consider when evaluating the risk opportunity cost between CMBS loan requirements and the business plan that they have for their property.
There are many benefits to utilizing a CMBS loan for your financing needs:
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