Commercial mortgage-backed security loans, also known as conduit loans, are used to finance the purchase of commercial properties of all sizes. CMBS loans have significant benefits for borrowers and are just one option available to those who may be shopping for a commercial loan.
What is a CMBS Loan?
With a similar structure to traditional loans, this type of loan is used in commercial real estate and is secured by a first position mortgage on a commercial property. Conduit lenders, investment banks or commercial banks are often the sources that package, pool and sell these loans to commercial real estate investors.
For borrowers who are looking for higher leverage and lower rates, conduit loans are often an ideal choice. These loans are securitized and held in a separate trust with other commercial loans. The loans serve as collateral for mortgage-backed securities, while investors may purchase bonds that receive a dividend based on the interest paid on the loans. In return for this investment opportunity, borrowers receive lower rates.
A CMBS loan will also often have a fixed interest rate. The terms can be for as little as ten years, but 25 to 30 years is more common. Typically, a balloon payment is required at the end of the loan and is agreed upon in the initial terms.
Why CMBS Loans Work for New Property Investors
Although conduit loans generally have large minimum amounts that are out of reach for small investors, mid-sized new commercial investors may benefit from choosing a CMBS loan. Conduit loans often have a lower interest rate than a commercial loan, which may also be available as a fixed rate, making it easier for the borrower to plan their finances and achieve a return on his or her investment.
Conduit loans are also non-recourse, making them especially beneficial to new investors. If the loan enters default, once the property is sold the lenders cannot return to the borrower and ask for additional money to cover expenses.
The transference of property is typically easier with a conduit loan than with a traditional loan. There are some difficulties associated with conduit loans, however. Because they are placed in a pool that is supported by investors, to get out of or refinance the loan lenders will often have to replace the loan in the trust with a different security, like a treasury bond of equal value.
The terms available for CMBS loans are why many new property investors choose to investigate this lending option. Choose a knowledgeable investment firm or medium or large sized bank to find more information about this lending option.