If you are in the commercial real estate industry, you’ve probably heard about CMBS loans. In this article, we’ll explore how this type of financing works, how they differ from traditional commercial loans and the pros versus the cons of this type of real estate financing.
What are CMBS Loans?
CMBS loans are also referred to as conduit loans. They are used to purchase commercial real estate. Typically, the underwriting standards are flexible, and the property is used as collateral. However, CMBS loans are different than traditional commercial loans.
When there’s a traditional commercial loan, the lender is paid back over time- but with a conduit loan, it’s sold and packaged with other commercial mortgage loans in a trust called a Real Estate Mortgage Investment Conduit, transferred into bonds, and sold to bond investors. This is known as securitization.
Pros & Cons of CMBS Loans
When it comes to CMBS loans, some things are great about them and some things that are not so great. We’ll take a look at the pros and cons of this type of funding below.
Pros of CMBS Loans
The primary advantage of this financing vehicle is that the interest rate offered is typically better than a traditional commercial loan. In addition, there’s usually a fixed-rate option, which allows you to effectively plan your payments.
Additionally, these are non-recourse loans, which means the buyer isn’t liable for paying the loan. However, there is a clause stating that if the buyer intentionally causes harm to the property, the CMBS lender, or the investors- they could be held responsible.
Finally, CMBS loans are assumable, which means if you sell the property in the future, the buyer can take over the financing and interest rate. However, most lenders will charge a fee for this.
Cons of CMBS Loans
The main disadvantage to this financing vehicle is that the CMBS investors are the most important, which means the borrower doesn’t have much flexibility with negotiating terms and even less so once the documents have been signed.
Also, since CMBS loans are part of a trust, prepayment is usually not an option. If you want to get rid of the lien, you’ll have to go through a process known as defeasance, where the property is replaced with something else as collateral.
As with any other type of financing, CMBS loans are good in some ways and bad in others. You have to consider what is important to you before you sign. If a great interest rate is most important, CMBS loans are worth considering. On the other hand, if flexibility is more important, a traditional commercial loan may be better. Commercial financing can be complicated. Contact Triport Lending today to learn more about what will best meet your needs.