Although commercial mortgage-backed securities (CMBS) conduit loans have been around for almost 20 years, there are still many misconceptions about them. Understanding how they work can help you understand why investors like them so much. Although the loan originates much like a traditional loan, that’s where it ends. CMBS conduit loans are securitized and placed in a trust with other loans. The trust offers certificates or bonds to other investors, who receive a rate of return through the interest paid back on the loans.
Benefits of CMBS Loans
With CMBS conduit loans, the interest rate is usually much lower than what your business would pay through a traditional loan. Over the term of the loan, this equates to thousands of dollars that will stay in your company instead of being paid in interest to a lender. A conduit loan is a non-recourse loan, which relieves you and your business of personal guarantees. In addition, the loan is often amortized for 30 years.
If you’re wondering what the downside is, it all depends on the goals and objectives of your business and the property. CMBS conduit loans have prepayment penalties, because the investors are expecting a return their money. This isn’t a con, unless you want to sell the property before the end of the trust. If your goal is fix up the real estate, then sell, then a CMBS loan probably isn’t right for you. However, as an investor, it may be the right option, as it will force you to hold onto the property long-term.
Another issue can be servicing and refinancing. With CMBS conduit loans, you aren’t going to get the service that you might from a traditional loan. You have to decide what you need over the course of the loan. The money you save in interest might be worth not having the ability to refinance or get serviced. It really depends on your business needs. Investors like CMBS loans due to the long-term savings because they generally are it in for the long haul.
Choosing the Right Financing Option
When you are looking at a major deal, CMBS conduit loans may make sense. You have to discuss your specific situation with a mortgage broker who can run the numbers and tell you if your property and business qualifies for a CMBS loan. They are very popular with investors, simply because of the money saved over the length of the mortgage. You’ve got nothing to lose but time by discussing your needs with someone who understands the CMBS market.