Need To Finance a Commercial Real Estate Investment? Try CMBS Loans

Commercial Mortgage Backed Security loans (CMBS loans) are an option for financing commercial real estate investments. Most real estate investors are somewhat unfamiliar with them.

How Can You Use a CMBS Loan?

A CMBS loan is also called a conduit loan. These loans are secured by commercial real estate mortgages. These loans are not made for residential real estate. Liquidity is a benefit that a CMBS loan can provide to real estate investors and commercial lenders. Loans that may become part of a CMBS loan include these types of real estate loans:

  • hotels
  • office buildings
  • factories
  • apartment complexes
  • shopping malls.

CMBS loans do not have a standard structure and often have many details, so their valuation may be difficult. A CMBS loan has a lower risk of prepayment due to the fact that these loans have a fixed term.

CMBS Participants

Very wealthy investors are typically investors in CMBS loans. Real estate mutual funds often invest with CMBS. The market for CMBS accounts for 2% of the fixed-income market in the United States.

CMBS are complex with a large range of participants. Entities involved include the primary servicer, the master servicer, the special servicer, the investors, directing certificate holder, trustees and rating agencies. Each of the participants has a specific role to ensure that the CMBS functions properly. SEC and FINRA regulations have been created to establish margin requirements to mitigate the risk of these securities.

CMBS Structure

A CMBS loan is actually a group of commercial property loans that are grouped with similar type loans. The package is securitized and sold to investors in a secondary market. The pooled loans are maintained in trust. The CMBS loan has the pool of commercial real estate loans as collateral.

Securitization enables banks to finance more loans, and securitization gives investors the ability to realize higher yield than with government bonds by investing in commercial real estate.

Commercial Mortgage Backed Securities are divided into tranches that vary by degree of risk and return with various maturities). Pension funds and other low risk investors will take the low risk tranches while hedge funds and other high risk investors take the higher risk tranches.

These commercial loans are usually structured as non-recourse loans, permanent, and with fixed rates. The rates are usually lower than the rates on traditional real estate loans.

Prepayment on Commercial Mortgage Backed Securities loans is different than with traditional commercial loans. Prepayment is typically defeasance. Another form of penalty for prepayment is yield maintenance.

Consider a CMBS Loan When Financing a Commercial Real Estate Investment

CMBS loans should be considered as an option for commercial real estate investments financing. When you understand the requirements and benefits, you will know if CMBS is an option for you.


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