Borrower’s Pros and Cons of a CMBS Conduit Loan
CMBS lending activity pushed higher in the second quarter of 2017, according to a recent article published by Bisnow, surpassing the issuance in the same period of the prior year. The healthy demand for CMBS loans has helped ease the fear of the negative impact of risk retention that the market had been struggling with. In fact, the main concern in the CMBS market has shifted to the future of retail, financing loans, and the possible delinquencies coming down the pike on legacy loans.
This is a green light for lenders to step up to volume in the market, as they are doing now. This is also a positive for a potential CMBS borrower, as stronger demand in the conduit capital markets means an attractive cost of capital. So when is a CMBS loan right for a borrower?
101: A conduit is a pool of commercial real estate loans that is sliced up and sold out to investors in tranches.
Do it! Pros of a CMBS loan
CMBS loans often have a very attractive “sticker price” for assets with stable cash flow. If a sub-4% fixed rate is all you need to know, you’ll want to check on the CMBS market for your deal.
CMBS loans can often leverage an asset up to 75% of the appraised value, which can be higher loan proceeds than local capital sources in many markets across the country, particularly secondary and tertiary markets.
The collateral in a CMBS transaction is a senior loan for the underlying property. While the industry has developed standard language known as “Bad Boy Provisions” to prevent fraud or foul play on the part of borrowers, you typically don’t see full recourse in a CMBS loan.
Some investments will qualify for Interest-Only payments, potentially for the full life of the loan. This is the ideal situation for maximizing current cash flow, as there
Slow down now… Cons of a CMBS loan
Getting out of a CMBS loan is not as easy as getting in. Paying down your loan principal early requires a process called Defeasance, which can be involved and costly. If you need to keep easy access to pulling out your invested capital through selling or refinancing your property before maturity, CMBS would probably not be the right fit.
Once your property is leveraged as part of a CMBS conduit, you’ll need to provide audited financial statements to your primary servicer every year.
The more you know
Whether or not a CMBS loan is right for your project will come down to your specific loan scenario, but one thing that never hurts is knowing. You’re best suited to pursue all of your options, lay them out for comparison, and then make your decision. For stabilized commercial properties with a value of at least $4 million, that will mean including CMBS quotes.
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