The Pros and Cons of CMBS Conduit Loans

In order to understand the pros and cons of CMBS conduit loans, you need to understand how they are structured. In a commercial mortgage-backed security (CMBS) loan, the financing starts out much like a traditional loan, but once it originates, it is securitized and placed in a trust with other CMBS loans. Investors then purchase the bonds issued by the trust and wait for you to pay off the loan to receive a return on their own investment.

Pros of Conduit Loans

The big advantage to a conduit loan is that it often is priced between 1.75% to 2.25% over LIBOR. Traditional loans often go much higher than that. In addition, most CMBS conduit loans are non-recourse. Both of these aspects save a lot of money over the course of the loan. The upfront fees can also be much less, and broker fees can be much less than a traditional mortgage. A conduit loan must usually meet a minimum amount, generally two million dollars or more.

Cons of Conduit Loans

CMBS conduit loans can be very strict and have little servicing. Your business may be unable to refinance this type of loan, and prepayment is complicated. There are penalties for prepayment, because investors are counting on the interest as their recourse for investing in the trust. With CMBS loans, the business and the loan must meet certain criteria or it won’t qualify. CMBS loans are typically amortized at 30 years, but the interest rates are generally fixed.

Choosing the Best Option

There are many factors which come into play when choosing the best option for your real estate transaction. You should look at the money saved by getting a better interest rate with a conduit loan, but you also need to consider the long-term goals of the property and your business. This is not a loan that is easily sold. It may be difficult to get additional financing using the property as collateral.

Take time before you finalize a loan to really understand the pros and cons of CMBS conduit loans. Discuss the options with a mortgage specialist to be fully see the numbers both in the short-term transactional fees and the long-term interest costs. Only you can decide when you have the information that helps you choose wisely. CMBS conduit loans have been servicing the real estate community financing needs since the late 1990s, and they are certainly a good option for investors who won’t be selling the property quickly.