CMBS (Commercial Mortgage-Backed Securities) is a type of financing used for stabilized commercial real estate assets. This financing is typically used by property owners and investors to fund the purchase or refinance of cash-flowing commercial properties.
So, how does CMBS work? Essentially, CMBS is a type of mortgage-backed security that is backed by a pool of commercial mortgages. These mortgages are typically issued by a group of lenders, such as banks and other financial institutions, and are then sold to investors on the secondary market.
The benefits of CMBS financing include access to low interest rates, longer amortizations, and interest-only periods, while remaining non-recourse throughout the term of the loan. Loan terms are typically either 5 years or 10 years until maturity, though amortization periods can vary. CMBS lenders typically underwrite property cash flows on a Debt Yield basis. CMBS financing is therefore not a fit for development projects or most value-add deals.
CMBS loans are not typically available on the smallest loan sizes, and the legal and closing costs are elevated compared to traditional bank financing. Another drawback is the complex and expensive process for paying a CMBS loan back early, which requires a process called Defeasance to pay back bond investors that purchase shares of the loan pool. Therefore the sponsor’s business plan should call for holding the loan until maturity in most cases.
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