Everything You Need to Know About CMBS Conduit Loans
Conduit loans, also known as CMBS loans, are commercial mortgages packaged with similar commercial loans and sold to institutional investors in secondary markets. The word used to describe this process is securitization. The loans in the pool then serve as collateral for the security.
These secondary markets are large and provide much of the liquidity in the commercial mortgage market. The security winds up broken into tranches. This means that the mortgage back security breaks into different parts at different levels of risk, maturities and return. Investors of pension funds are more likely to take the lower risk while hedge fund investors take the higher risk.
CMBS conduit loans are permanent, fixed-rate commercial property loans. Compared to traditional real estate loans, these loans tend to provide low fixed-rates. Their prices come from a comparable treasury rate along with property quality grade, tenant bond grade, tenant quality, management, property location, seasoning and cash flow.
Some of the differences between traditional loans and conduit loans come from the payment. In fact, the prepayment is completely different from a traditional loan. The prepayment utilizes something called defeasance. Defeasance is when the borrow purchases substitute collateral for the conduit loan. Single or multiple US Treasury securities are then purchased to complete the defeasance. There are no minimum prepayments and the borrower might actually receive payment during defeasance.
Yield maintenance is another way that prepayment penalties occur. Yield maintenance is the minimum yield to the investor who bought the CMBS conduit loans.
When it comes to conduit loans, businesses may receive them for a number of different income producing properties. For instance, they may receive them for:
- Self-storage facilities
- Multi-family properties
- Industrial buildings
- Retail properties
Conduit loans tend to offer attractive interest rates, but keep in mind that there are prepayment penalties, subordinate financing and commitment fees. The borrower does have less room to negotiate changes but in some cases, this is preferable. When it comes to payment, the investor does not pay the lender. Unlike traditional loans, the borrower will pay the commercial mortgage servicer. This servicer makes sure that the payments are applied how the conduit mortgage documents state.
When it comes to CMBS conduit loans, they tend to be a lot more complicated than the traditional loan. One of the biggest benefits of the conduit loan is that it has a low interest rate in comparison to other loans. This makes them attractive options to a lot of commercial property investors.