Assumable CMBS debt?

[Jimmy Klein]

Looking at a commercial asset that has an existing CMBS loan with very attractive terms. The loan is very new actually. I wanted to know, if we were to purchase the property, how would the CMBS lender underwrite us. Obviously, they have already lent to the property, so there won't be much underwriting in this sense. The loan amount is around $8 million. We have enough to purchase the property, but I heard the CMBS lender will underwrite us and require almost 10% of that in liquidity. This is a huge stretch. Is this true? Or will the lender just vet our capability to run the property?

[Joel Owens]

I have had clients do CMBS deals.

I am very familiar with them. Sounds like the seller had a refi coming up on a loan due and didn't know if the property was going to sell. So they placed new debt before it happened.

So in these cases you see brand new loans that are only 1/2 a year to 1 year old. CMBS buyers of debt are guaranteed a set return for a certain period of time. This why you have the huge pre-pays attached. A lot of CMBS I am seeing is 10 year term and 30 year amortization with an option for the first 2 years to be I/O. Interest only will increase basis points returns about 200 to 300 but you will not have principal pay down the first two years. This type of scenario works well if the cap is lower or big rent increase of 6 to 10% are occurring in the first two years. In that situation the rent is going to increases much higher so when principal and interest kick in your cash on cash remains about the same.

CMBS is non-recourse but has carve outs in the loan docs. There is also a "cash management account" where the PM company is directed tenant rents get sent FIRST. The lender or servicer takes out estimated reserves for TI and LC's, property taxes, estimated cam re-imbursement, mortgage payment, insurance. What is leftover they move into the borrowers account as the cash flow pre-tax profit.

So in non-recourse the lender makes sure they are heavily protected. The cash management accounts is one negative is they hold higher reserves than you might so traps more of your cash flow during the year versus a standard loan.

Non-recourse is great for HNW ( 1 million or more ) or UHNW people ( 25 million or more ) because no matter how rich you are or other assets you own the lender's only recourse is that asset as long as you do not violate one of the carve outs that turns in into recourse debt. 

CMBS is great to because you have leverage if the market goes bad with the lender for a workout. With a regular loan and full recourse etc. and you have money they will generally stick it to you and not budge much rather than doing a workout.

They do qualify a buyer to assume a loan. Cost is generally 1/2 to 1 point to assume and you will have to cover the lender attorney legal costs. The seller could also agree to pay it or you both split the fees evenly or unevenly.

They do look for liquidity, track record, references etc. The PM company must also be approved by the CMBS lender. You can't start self managing and control the cash etc. with no track record versus a company with 2,000,000 sq ft under it's portfolio and 30 years in the business and expect the CMBS lender to go for that.

Some of the larger CMBS lenders we have worked with do billions a year in CMBS.