CMBS Loan Assumption

[Dirghayu Desai]

I am trying to understand the mechanics/math behind a CMBS loan assumption and the cash/equity needed from a buyer who would acquire the property and assume the loan.

Example parameters below:

Original Loan Balance: $7.5M

Current Balance: $7.0M

Acquisition price: $9M

Remaining loan term: 80 months

 Also any website/articles outlining the loan assumption process would be appreciated. 

[Joel Owens]

Hi Dirghayu,

CMBS is a more complex borrowing instrument than a typical loan. They can be for more advanced investors.

Unlike typical loans CMBS can have defeasance or yield maintenance. The debt is generally bundled and sold off as securitized debt slices on Wall Street to note investors. They are almost guaranteed a certain yield for a length of time so if you want to cancel the loan early there is generally a huge fee to do so. On a loan like you are talking to break it could be over 1 million sometimes!

CMBS will often do loans on properties that life insurance companies would not touch. So they can have their place in certain situations. Back in the day many years ago you could only get a crappy 3 year loan term from a bank and CMBS was about the only 10 year fixed money for commercial out there. Today a lot of regular lenders will do 10 year fixed so CMBS has fallen out of favor for lots of investors. CMBS is still used for oddball hard to finance properties or properties so big that regular lenders do not want that much concentration of risk in one loan.

CMBS legal fees to assume or originate a loan can be much higher than regular bank loans. A bank with boilerplate legal docs might have a 3k to 5k attorney fee whereas CMBS could reach 20k to 40k in fees or more depending on the circumstances. CMBS loan assumption can take a very long time versus doing a new loan. You can have a master servicer, special servicer, general servicer and they can all do different functions. The CMBS might be non-recourse but you have to pay attention to the loan covenants as they might have tons of springing recourse provisions ( a recourse loan in disguise) . Usually you want a CMBS loan to only have fraud and bankruptcy as recourse provisions (very narrow instead of broad).

When an assumption is done you can waste 6 months and not get anywhere. There are specific expediter companies that specialize in CMBS assumptions. Typical fee is about 10,000 or so. Generally you try to get the seller to pay the fee or split the fee for the assumption.

The assumption is a time when the CMBS lender can hit the buyer up with altering the loan docs and making more demands for reserves, fees to assume the loan, and changes to the lockbox account. The lockbox account is a sweep account where the lender holds a forced reserve from the properties cash. To give non-recourse and only have the property as recourse they want to hold forced reserves in an account and only after that distribute the cash flow to borrower. Borrower has to agree to this in the loan docs for the assumption or doing a new CMBS loan.

Each CMBS loan is different. The deal has to be amazing to want to go through a CMBS assumption and the loan terms still good versus what can be had today.

I would have the see the property at hand to see what is possible.

No legal advice given.