Why CMBS Loans Are Good Alternatives to Bank Loans
When most of us think about getting a loan, we automatically consider a traditional bank loan. For almost a decade, real estate investors, property moguls and retail landlords are turning more frequently to CMBS loans, or Commercial Mortgage Backed Securities.
How a CMBS Loan Works
CMBS loans, alternatively called “conduit” loans, have been around since the 1990s. This product is basically a bundle of loans grouped together. These come from different investors in varying sectors. The originator of the conduit loan collects this package, then securitizes it and sells it to investors. It is then held in trust as collateral for the loan, or Mortgage Backed Security.
Typically, banks and insurance companies that finance traditional commercial real estate loans focus upon prime properties. They target upcoming and established markets like New York and Colorado. More and more investors are willing to try CMBS loans on less prestigious properties due to higher leverage.
A major advantage CMBS loans have over conventional bank loans is that these loans are non-recourse, meaning the borrower won’t be responsible for financial recourse if the loan defaults. Another advantage is that a typical CMBS loan has a longer term. These flexible loans give working capital to owners, investors and developers a more creative way of financing their projects.
Renovating aged retail spaces can draw new and exciting tenants, increasing the income as well of the value of the property. CMBS loans are being used to fund projects in areas with high default rates, rural locations and secondary markets.
CMBS deals have been reported as higher risk options for investors, but the lenders that handle these loans know how to screen applicants. They are also subject to strict underwriting principles. Ratings agencies keep lenders under constant watch as a benefit to the consumer.
For borrowers, CMBS loans provide more flexibility in structure with a term of up to 10 years. Other potential benefits include extendable, interest-only payment periods and leverage points that increase to 75 percent or even higher.
Who Uses CMBS Loans?
The CMBS borrower might be a one-person operation or a massive global REIT. Loan amounts start at one million dollars and are only used for commercial properties. They cannot be used for single-family residential projects.