What Are CMBS Conduit Loans?

The commercial real estate mortgage industry is branching out to offer more options for funding your business loan. Most people are familiar with a portfolio loan, the traditional funding originated by the lender and held on the lender’s balance sheet until the loan matures. With commercial mortgage-backed securities (CMBS), the loan is securitized and lumped into a trust in which investors can invest. CMBS conduit loans can save the mortgage holder money, but some key differences should be examined before using this type of mortgage.

 Understanding the Basics of a Conduit Loan

CMBS conduit loans are often referred to as just CMBS loans or conduit loans. In this transaction, many single commercial mortgages are pooled together and then transferred to a trust. The trust then issues bonds that can be purchased by investors. Often, the trust creates tranches, where the risk is separated between investors. As the loans are paid back, investors receive the interest money based on their bond purchase.

This leads to one of the significant issues with CMS conduit loans. Investors are expecting to receive a return on their investment. Therefore, prepayment is not allowed, except under very specific terms. Generally, only in the last few months of the loan. Should the mortgage holder wish to pay off the loan early, they must purchase securities as a provision to void the loan. This is called defeasance, ensuring that the investors receive a return.

Advantages of a Conduit Loan 

However, there are advantages to a CMBS loan. One is that borrowers often get better interest rates throughout the loan. Although several factors can affect the mortgage rate, just one interest point can make a huge difference in the profitability of real estate. As interest rates go up, capitalizing on lower rates lets borrowers take advantage of every bit of savings that they can.

Another benefit of CMBS loans is the lack of competition. The real estate market is highly competitive in today’s economy. It’s time to take a look at conduit loans to see if one would benefit your project. While CMBS conduit loans have different guidelines than traditional funding for commercial real estate, the overall savings, high LTV, and low interest make them very attractive to property investors.

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