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What Property Types are Eligible for CMBS Financing?
In this article, we examine some of the most popular — and some of the most overlooked — property types eligible for CMBS financing.
- Popular CMBS Eligible Properties
- Multifamily Properties
- Office Properties
- Industrial Properties
- Retail Properties
- Hotel Properties
- Mixed-Use Properties
- Self-Storage Facilities
- Less Common CMBS Eligible Assets
- Healthcare Properties
- Parking Garage Properties
- Marina & Boatyard Properties
- Related Questions
- Get Financing
Image by Brandon Griggs via Unsplash
CMBS loans can be used for almost any kind of income-producing commercial real estate asset. This may seem vague, but truly, conduit financing is available for a diverse array of property types across sectors, including retail properties, self-storage facilities, office buildings, marinas and boatyards, parking garages, industrial assets, and more. In this article, we’ll explore some of the most popular property types for CMBS financing.
Popular CMBS Eligible Properties
Multifamily Properties
In a market still dominated by agency products from Freddie Mac® and Fannie Mae®, many investors opt for CMBS loans to finance their larger multifamily and apartment purchases. CMBS financing isn’t only utilized for traditional apartment properties either — it’s also a widely used financial vehicle for student housing, senior care facilities, and mixed-use properties.
Office Properties
Office assets have always been quite popular in the CMBS loan market, and the financing vehicle’s non-recourse nature makes them extra attractive to office investors. CMBS financing can be effectively used for the acquisition, cash-out, or rate and term refinancing of office property types, from traditional high-rises and low-rises to single-story office parks, medical office buildings, and mixed-use buildings — though, only Class A and Class B office properties are generally eligible for CMBS financing.
Industrial Properties
The Industrial property sector encompasses assets ranging from warehouses and distribution centers to refrigeration and cold storage facilities and even large-scale manufacturing plants — all of which are broadly eligible for CMBS financing. One of the most beneficial perks to utilizing CMBS loans for industrial assets is the assumability. Investors looking to sell an industrial asset will find that this greatly increases the number of potential buyers, as some may jump at the opportunity to assume existing financing rather than go through the somewhat lengthy process of obtaining a new loan.
Retail Properties
When it comes to longer-term, fixed-rate financing for stable retail properties, investors have come to find CMBS financing indispensable. Across the sector, CMBS loans are used to finance everything from small strip malls in busy suburban areas, to regional shopping malls. CMBS lenders generally prefer retail assets with strong, long-term anchor tenants as well as properties managed by experienced organizations.
Hotel Properties
Hospitality properties typically garner higher DSCR requirements from CMBS lenders, but despite that, CMBS loans are still a popular way for hotels to get the funds they need to make necessary renovations and improvements. Within the sector, investors have sought conduit financing for boutique hotels, budget or value hotels and motels, and even major, well-known hotels and resorts.
Mixed-Use Properties
Mixed-use properties have been on the rise in recent years — and many of these completed projects have utilized CMBS financing. Lenders are issuing CMBS loans for a wide selection of mixed-use properties, ranging from apartment properties that contain a few units for commercial tenants, to much larger mixed-use complexes that have become increasingly popular in more densely populated areas that combine living spaces with a variety of different retail stores, restaurants, or entertainment businesses.
Self-Storage Facilities
The self-storage industry has shown near unyielding resilience to the economic downturn that has damaged many other sectors throughout the pandemic. As more investors show interest in adding self-storage assets to their portfolios, CMBS loans remain a solid option available for financing several different classes of self-storage businesses. Most of the time, CMBS lenders will typically only offer financing for Class A self-storage assets — but in general, the facility must have high-quality construction and be located in or near areas with high population density and equivalent demand.
Less Common CMBS Eligible Assets
Healthcare Properties
From smaller healthcare office complexes to standard hospital properties, CMBS financing is available for many of the more commonly found healthcare industry assets. But, while CMBS loans can be a great way to fund these acquisitions, the hospital or healthcare firm itself cannot be considered as the borrower in most cases. This stems from the fact that CMBS financing is generally not available for owner-occupied properties, though some exceptions may occur. In order for investors to work around this, a real estate firm or similar entity would have to take out the CMBS loan on the property, and then lease it to the owners of the hospital or healthcare firm.
Parking Garage Properties
With the right location, parking garages can generate a significant amount of revenue. Luckily, investors of these assets can finance their acquisition while enjoying the flexibility, nonrecourse structure, and competitive fixed interest rates that conduit loans have to offer. Generally speaking, CMBS-eligible parking garages are typically well-positioned Class A or B multi-story properties in dense population centers.
Marina & Boatyard Properties
As income-generating properties, both marinas and boatyards are CMBS eligible — even though they often are overlooked by borrowers. While CMBS loans place less of a burden on borrower creditworthiness, they do put more focus on the income generating ability of the collateral property. Boatyards and marinas are typically highly competitive in nature, but are often lucrative investments in the right markets — a favorable trait for obtaining CMBS financing.
Related Questions
What types of commercial real estate properties are eligible for CMBS financing?
CMBS financing is available for a variety of commercial real estate properties, including retail properties and mixed-use properties. Retail properties that are eligible for CMBS financing generally have strong, long-term anchor tenants and are managed by experienced organizations. Mixed-use properties that are eligible for CMBS financing range from apartment properties with a few commercial tenants to larger complexes that combine living spaces with retail stores, restaurants, or entertainment businesses.
For more information, please see this article.
What are the advantages of CMBS financing for commercial real estate?
CMBS loans offer a variety of advantages for commercial real estate borrowers, including:
- Flexible underwriting guidelines
- Fixed-rate financing
- Fully assumable
- Lenders and bondholders can potentially achieve a higher yield on investments
- Investors can choose which tranche to purchase, allowing them to work within their own risk profiles
Additionally, CMBS loans can provide the highest leverage loan a borrower can get for properties in secondary and tertiary markets.
SourceWhat are the requirements for CMBS financing?
In general, lenders look at two major metrics when deciding whether to approve a CMBS loan; DSCR and LTV. However, they also look at debt yield, a metric which is determined by taking the net operating income of a property and dividing it by the total loan amount. This helps determine how long it would take a lender to recoup their losses if they had to foreclose on the property. And, while it’s true that CMBS loans are mostly income based, lenders still typically require a borrower to have a net worth of at least 25% of the entire loan amount, and a liquidity of at least 5% of the loan amount.
Commercial mortgage-backed securities are primarily available for the financing of any income-producing commercial property. This includes:
- Multifamily assets (including mixed-use properties)
- Hospitality assets
- Office assets
- Retail assets
- Industrial assets
While this list is not exhaustive, many other property types fall into the larger categories listed above. There are also assets like parking garages and marinas that are a bit harder to classify. Regardless, as they are all examples of income-producing commercial properties, they are also eligible for CMBS financing.
To summarize, the requirements for CMBS financing include DSCR, LTV, debt yield, a net worth of at least 25% of the entire loan amount, and a liquidity of at least 5% of the loan amount.
What are the risks associated with CMBS financing?
CMBS financing can provide a high leverage loan for properties in secondary and tertiary markets, but it can also provide a particularly poor loan servicing experience rife with significant prepayment penalties. Other risks associated with CMBS financing include:
- Less autonomy in the operation of the property and limited flexibility to deviate from the terms of the loan documents.
- Difficulty in releasing collateral.
- Expensive to exit.
- Lock outs often prevent prepayment or up to two years.
- Reserves required.
- Secondary financing (i.e. mezzanine debt or preferred equity) not always allowed.
For more information, please visit The Pros and Cons of CMBS Loans: A Guide and Multifamily CMBS Loans.
What are the benefits of CMBS financing for small businesses?
CMBS loans can provide small businesses with flexible underwriting guidelines, fixed-rate financing, and fully assumable loans. Additionally, lenders and bondholders can potentially achieve a higher yield on investments, and investors can choose which tranche to purchase, allowing them to work within their own risk profiles.
For more information, please see The Pros and Cons of CMBS Loans: A Guide and CMBS loans in Apartment Investing.
- Popular CMBS Eligible Properties
- Multifamily Properties
- Office Properties
- Industrial Properties
- Retail Properties
- Hotel Properties
- Mixed-Use Properties
- Self-Storage Facilities
- Less Common CMBS Eligible Assets
- Healthcare Properties
- Parking Garage Properties
- Marina & Boatyard Properties
- Related Questions
- Get Financing