Is a CMBS Loan the Right Choice For Me?
CMBS loans (commercial mortgage backed securities) typically offer flexible underwriting standards and extremely competitive rates, making this type of loan very attractive to commercial real estate investors. CMBS loans can be used across most asset classes such as multifamily, office, retail, and industrial. Most people have heard of them, but what in the world are they?!
Here’s how it works:
Lenders that offer CMBS loans initially fund the loan with their own money at closing, then sell off portions of the loan in a process called “securitization”. This is NOT your typical loan with your local bank.
Let’s break it down…A real estate investor purchases a piece of real estate and gets a loan through a CMBS lender. Some of these lenders include companies like Morgan Stanley, JP Morgan, Goldman Sachs, etc. Once the loan is closed, the process for the investor purchasing the asset is over. On the flip side, the lender’s job is just getting started.
The lender now pools that mortgage together with other mortgages and turns them into bonds. These bonds are then rated by rating agencies like Moody’s or Fitch. After each mortgage-turned-bond gets rated, the bonds are then sold off to institutional investors for prices corresponding to the class of the bonds. These clusters of bonds are called tranches. Much like a typical bond, some bonds are riskier than others and some bonds are more attractive to certain investment appetites. The higher the risk, the higher the yield on investment and vice versa. The process of turning the cluster of mortgages into bonds is called securitization.
Like everything in life, it’s not ALL sunshine and rainbows. CMBS loans usually offer extremely competitive rates and higher leverage, but you’ll give up reasonable prepayment structures and loan flexibility to get it.
Here’s a short list of other items to consider before signing on the dotted line.
– lower interest rates
– the loan is usually non-recourse
– higher leverage
– higher reserve requirements
– prepayment penalties
– additional reporting requirements
At the end of the day, you need to find the best fit for you and your situation. If you need added flexibility, you may be better served by a traditional commercial loan, but if getting a great interest rate is your main concern, then a CMBS loan may be right for you.
Feel free to reach out to our team to discuss what type of loan might be the best fit for you. After closing over $40 BILLION in loans, it’s safe to say that we know what we’re talking about.
Adam Dickert is a Partner at Progress Realty Partners. He began his career with Marcus & Millichap as a commercial broker, establishing relationships with some of the most successful real estate owners, operators and investment funds. He spearheads the acquisition and deal valuation activities while overseeing the transaction process from first glance to closing. Adam utilizes his finance background to get a full grasp on the economics of each asset and implements ultra-conservative underwriting practices to ensure minimum risk, as well as steadily increasing returns for partners. www.prp.us