What Is A CMBS Loan?
With a traditional commercial real estate loan, you receive funds and pay the loan back to the lender over the course of several years. However, when you get a conduit loan, the loan will be packaged with other commercial mortgages into a trust, known as a Real Estate Mortgage Investment Conduit (REMIC), and sold on a secondary market to investors. This is a process known as securitization, and therefore these loans are also referred to as commercial mortgage-backed security (CMBS) loans.
After your loan is sold to investors, this will change some aspects of how the loan will be administered and who you will deal with when making payments or changing the loan.
Most conduit loans have a balloon payment at the end of a five or 10-year term, however, the monthly payments follow a 20 or 30-year amortization period. This means that the monthly payment will be equal to what you would pay if the loan had a 20 or 30-year term, but you will pay off the loan in five or 10 years instead. The last payment on the loan will be the balloon payment where you pay back the remaining principal and interest.
Conduit loans normally have lower interest rates when compared to traditional commercial mortgages, and most have fixed interest rates. The interest rate will generally be based on a U.S. Treasury rate plus a margin. Your creditworthiness, the value of the property you’re purchasing, and the strength of your business will all affect the margin.
Another thing that is attractive about CMBS loans is that most are non-recourse and assumable. A non-recourse loan means that a borrower is not personally responsible for repayment of the loan. This means that you won’t have to personally guarantee the loan. The main exception to this is what is known as “bad boy carve outs”, meaning that if you intentionally cause harm to the property, conduit lender or investors, you could become personally liable.
Many CMBS loans are fully assumable. This means that if you sell your property, the buyer can take over the loan for you, releasing you from any obligation on the loan. Some conduit lenders do charge a fee for allowing the loan to be assumed by another borrower.
Loan assumption normally occurs when the loan on the property has a below market interest rate, as it helps the buyer save money on financing the property.
One downside to conduit loans is that there may be less flexibility in negotiating loan terms, because the trust overseeing the securitization of the loans must comply with certain tax laws. In addition, once the loan documents are signed, you may have little recourse to change terms or features of the loan (again due to the tax laws governing the trust), unless the loan is in default.
To find out if a CMBS loan is right for you, contact PHD Financial today at 561.508.7558.