Commercial Mortgage-Backed Securities (CMBS) Loan
Commercial mortgage-backed security (CMBS) loans are a type of popular commercial real estate loan secured by a first-position mortgage for properties such as warehouses, offices, apartments, hotels, shopping centers, and retail buildings. They are offered by conduit lenders, as well as investment and commercial banks. CMBS loans typically come with five, seven, or ten year term lengths, however they are amortized over a 25-30 year duration. Because of the loan term and amortization schedule being out of sync, a balloon payment is required to be paid at the end of the term. Alternatively, the outstanding balance can be refinanced.The minimum loan amount for a CMBS loan is $2 million, and the maximum is determined by the underwriting parameters ..
CMBS loans come with fixed interest rates, which are generally based on the swap rate plus a spread, or the lender’s profit. Over the years, the rates have been hovering in the 4-5% range, though in certain market conditions have gone as low as 3%.
CMBS loans are non-recourse. While the lender can use the property and any profit generated from it as a repayment for the loan, the borrower has no personal liability and the lender cannot seek any further compensation beyond the collateral. The lender can however pursue legal action if a borrower purposely damages the property.
A conduit loan is also fully assumable. This means that if the borrower decides to sell their commercial property, they can pass the loan on to the buyer. In some circumstances however, the borrower may have to pay an extra fee to the conduit lender .
Prepayment penalties are designed to allow the lender to make the same profit that they would have made if the loan had been paid off within the agreed time frame.
In the case of yield maintenance, the borrower pays a penalty of 1 to 3% of the loan value in addition to the outstanding loan balance. The borrower’s note is then canceled and the loan is considered paid off.
In contrast, CMBS defeasance does not allow for the loan to be repaid or the borrower’s note to be canceled. Instead, the real estate is replaced by alternative
