What is a CMBS loan and why do you care?

[Nathan Click]

A CMBS loan or Commercial Mortgage-Backed Security loan, also called a Conduit Loan, is a unique method of securing financing for stabilized revenue-generating investment properties. These loans are not as familiar to investors as traditional loans, although they have been in play since the 1990s. Funds for these type of loans are sourced from securities. The security is then collateralized by commercial real estate notes. These loans are used for stabilized revenue-generating commercial properties such as apartment buildings, office complexes, mixed-use real estate, or hotels. CMBS loans have advantages over traditional financing. They are non-recourse, meaning a borrower can avoid signing a personal guarantee and fixed interest rates for five to ten years. Also, expect a term of ten years with an amortization of about 25 years. CMBS loans are generally 75% LTV based on appraisal. Currently, rates can be as low as 4.75%, which is a big advantage considering that, generally speaking, conduit loans are not credit-driven therefore, low credit scores have absolutely no impact on the financing. The underwriting decisions are made based primarily on the asset's cash flow. There are some disadvantages, such as, owing a prepayment penalty and a balloon payment at the end of the term; however, refinancing is always an option. Once again, these loans are a great solution for an investor seeking to acquire or refinance a stabilized, revenue-generating, non-owner occupied asset such as apartment buildings, office complexes, mixed use real estate, or hotels.