CMBS Loans: How They Can Work For You
First of all, what are CMBS loans? Also known as “conduit” loans, a Commercial Mortgage Backed Security, or CMBS, is a type of commercial mortgage. The mortgage is made up of other loans, packaged together, and then securitized. From there, the mortgage is sold to investors. It’s then held in a trust, acting as collateral for the Mortgage Backed Security.
A unique type of financing, CMBS loans tend to be more complex than traditional loans. The way they can work for you is that they can provide liquidity for commercial lending institutions as well as real estate investors. This particular loan is typically used for commercial property development such as retail stores, apartment complexes, industrial buildings, shopping malls and office suites.
This loan securitization process has certain advantages. It provides the investor with a higher yield than they might get with government bonds. This means a larger lump sum of working capital for times when you can profit from the deal. On the financial institution side of it, the process also allows banks to offer more loans and eases the process commercial borrowers must endure to receive their funds.
Because they’re structured to lock in current low interest rates, CMBS loans are attractive during upswings in the stock market. They also allow you to access your trapped equity. These loans typically provide for equity recapitalization, but some will offer cash out as well. This leverages the asset to current market value, all without providing a personal guaranty.
Depending upon the economy, CMBS loans can give you working capital for expansion or refurbishing a commercial property. The property starts earning more money, which can offset the cost of the security. CMBS loans offer other advantages in that they are non-recourse loans. This means that the asset is the collateral on the loan, giving no personal guarantee, which is in direct contrast with a traditional bank loan’s standard requirements.
When an investor takes a loan from a conventional source, such as a bank, the financial institution will keep the loan on its revolving balance sheet. The bank must service the loan for the entire period of repayment by the borrower. If the borrower defaults on the loan, the bank must collect it in order to satisfy their balance sheet. With CMBS loans, once the originators of the loans sell all available securities, the process ends for the originator. A third-party servicer monitors the loans from that point as the responsibility for collection now lies with them.