Commercial Mortgage Backed Securities (CMBS Financing) Explained

COMMERCIAL MORTGAGE-BACKED SECURITIES: CMBS loans are a staple of the commercial real estate industry which provide a safe & secure way to gain capital for new projects. We have all you need to know!

Commercial Mortgage Backed Securities (photo credit: PR)
Commercial Mortgage Backed Securities
(photo credit: PR)
CMBS loans are a staple of the commercial real estate industry which provide a safe and secure way to gain capital for new projects. The information below will serve as a primer on CMBS loans for new investors and firms who have never sought a CMBS loan, ensuring that the process of obtaining this loan will go smoothly. 

What Is A CMBS Loan?

CMBS stands for commercial mortgage-backed securities. A CMBS loan is a commercial real estate loan that is backed by a first-position commercial mortgage. Loans such as these are held and sold by commercial and investment banks or conduit lenders. CMBS loans are for properties such as apartments, hotels, warehouses, offices, retail, or any other type of real estate that is used in connection with a company or business in need of such a space.There are two types of CMBS loans — the traditional version or the delegated program. The traditional version works much like a conventional loan. Terms are agreed upon by both the investor and the lender, then the lender appoints a trust vehicle for the loan. The loan is then separated into bonds — also known as tranches — that are created based on a risk assessment of the value of the loan.
The delegated program, which is becoming increasingly popular, is a CMBS loan where there is one buyer for the CMBS loan and terms are agreed upon before the actual loan application is filled out. The terms generally come from the financial institution where the CMBS loan originated from.
Conduit lenders, like Commercial Loan Direct, offer good fixed interest rates on CMBS loans with a balloon payment occurring at the end of the loan period, which is typically between 25 to 30 years. Because the loans do not appear on the conduit lender’s balance sheets, they act as a secondary loan product to those who request them without unbalancing their position on liquidity. 

Who Needs A CMBS Loan?

CMBS loans are used for public and private real estate investment companies, real estate developers and investors, and commercial real estate investors, also known as CRE investors. These types of borrowers rely on a CMBS loan to help develop a commercial property, whether for construction or renovation, for a profit. Part of that profit is used to pay back the money loaned, in its entirety, over the term set forth in the agreement.
Using a CMBS loan allows investors to cull capital for present and future commercial projects, whether at home or abroad. In many cases, CMBS loans are given to foreign interests to help offset the costs of creating a headquarters or offices in a country where they are increasing their business. 
CMBS loans are also good investments for real estate firms and investors who are looking to bring value to a new city by building offices, residential properties, and even retail stores there. This type of loan benefits the community as well as the investors, who are providing value to a new area with the help of a CMBS loan.
Borrowers are encouraged to do their research when it comes to finding an institution that offers CMBS loans. While many large banks offer this loan, it is best to look at all of the options available for the best possible pricing, which may not always come from banks. In fact, many investors will be interested in knowing that a company, such as Commercial Loan Direct, offers competitive pricing and more reasonable terms than many large banks.

How to Get a CMBS Financing/Loan

Depending on your needs, you may find it helpful to contact several financial institutions for a loan quote. You will need to provide the amount you are looking to be loaned and the property type in order to get started.
After you request a loan quote, a loan officer will be assigned to your case. They will help you draw up the loan agreement terms, much of which will be standardized information. Some of the terms can be negotiated, such as the loan amount, the length of the loan, and the inclusion of loan assumption. Other terms, such as prepayment penalties and balloon payments, may not be negotiable.
You will also need to have a form of collateral for the loan. This can take the form of the property that you are building or bonds. The collateral is a form of protection for both you and the loan company in the event that you cannot repay the loan. It’s important to note that the collateral saves you from personal responsibility for the loan, so consider your options carefully.
Getting a CMBS loan can be a long process, but it is definitely worth it in the end. You will need to be patient while agreeing to terms. Be aware that a CMBS loan agreement cannot be altered after the fact. The best way to understand the process is to go through a company, like Commercial Loan Direct, that will walk you through the agreement step by step.

CMBS Loan Requirements

Investors looking to get CMBS financing or a loan should be aware of the loan requirements, many of which are non-negotiable and fixed, before any other aspects are negotiated to reflect the interests of both parties entering into the agreement.
Before any agreement can be drawn up, a CMBS loan lender will require some sort of collateral in the form of either a property or bonds. In America, the preferred type of bond is a U.S. treasury bond. It will also require a report on the borrower which maps out a plan for the money from the loan.
CMBS loans, which typically are a minimum of $2 million, require a balloon payment at the end of the term of the loan, which can be as little as 5 years and as much as ten years, with a 25-30 year amortization length. These loans balloon at the end because the term of the loan doesn’t sync up with the amortization schedule. The remainder of the loan must be paid off at the end of the term or be refinanced in order to make up the difference in payment.
CMBS loans are non-recourse, which means that although the borrower is not personally liable for the repayment of the loan, the lender has the ability to use the property which is put up as collateral and any profit from that profit as payment. While this is the normal course of action, in the event that the borrowing company intentionally causes damage to the property for which the CMBS loan was acquired, the lender is legally able to take action, sometimes in court, to recoup their losses.
There are also prepayment penalty structures put in place for CMBS loans, which no agreement can be made without. These penalties are put into place in the event that the loan is paid off far in advance of the maturity date of the loan, or bonds — if they are used as collateral — fall well below the price at which they stood at the time the agreement was made. It is important to note that these penalties are put into place to recoup any interest that would be accrued over the length of the loan.
There are two types of prepayment penalties — yield maintenance and defeasance. Yield maintenance means that the loan is paid off before the term is concluded and the mortgage note is canceled for that property. Defeasance is used when one source of collateral is substituted for another form, such as a property for US treasury bonds, or vice versa. 
Conduit lending through a CMBS loan is a great way to expand your business holdings while keeping liquidity throughout the length of the loan. Investors who are interested in learning more about or applying for a CMBS loan are encouraged to find a reputable company, such as Commercial Loan Direct, to answer any other questions they may have.

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Updated for 2016

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