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CMBS Loan Basics

CMBS Loan Basics

Some Basics on CMBS (Conduit) Loans

Commercial real estate investors have a plethora of loan options to consider before choosing the right source. One of the most popular investment options is a CMBS loan.

CMBS loans, also known as conduit loans, allow commercial real estate (CRE) investors an opportunity to finance commercial properties of all sizes; with loans starting as low as $2MM.

Despite having been around since the 1900s, many investors are unfamiliar with what conduit loans are and how they work. This is especially true when working with small banks, as most simply do not offer CMBS loans. For a holistic understanding of this type of loan, let’s take a closer look at what a CMBS loan is and how it works.

What is a CMBS Loan?

A conduit loan is a type of commercial real estate loan that is secured by a first position mortgage on a commercial property. Typically packaged, pooled, and sold by conduit lenders, investment banks, commercial banks, or a syndicate of banks, CMBS loans are ideal for CRE investors. 

These loans are held in a separate trust to serve as collateral for a mortgage-backed security. Borrowers who are looking for higher leverage with lowered fixed rates often prefer conduit loans over traditional commercial mortgage loans, as there tends to be a good deal less red tape.

Most CMBS loans have a fixed interest rate amortized over a 25-30 year time period, however, some offer as little as a 10-year amortization. A balloon payment is often required at the end of the term. These loans are typically non-recourse meaning they do not require a personal guarantee to secure the mortgage.

Who Uses CMBS Loans?

CMBS loans and or conduit loans are available for income-producing properties. For example:  multifamily properties, self-storage facilities, hotels, industrial buildings, retail properties, and office buildings. Any company seeking to invest in commercial real estate can consider CMBS loans as an option for their funding if they are seeking 75% or less leverage and have a loan request of at least $2MM.

How CMBS Loans Work

One of the greatest advantages of CMBS loans is their flexible underwriting guidelines. Most traditional loans are highly scrutinized and limit what is possible for borrowers. 

CMBS loans, on the other hand, are readily available to new CRE investors. Investors that cannot meet the strict conventional liquidity and possible net worth minimums can opt for a CMBS loan and receive the funding they need quite often with better rates and terms.

Thanks to the ease with which investors can access capital through CMBS loans, they are on the rise once again for commercial lenders. 

The lower fixed interest rates also contribute to their appeal. For a better return on investment without the scrutiny of traditional loans, many commercial real estate investors are considering conduit loans for their next investment or recapitalization of existing investments. 

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