A Commercial Mortgage Backed Security (CMBS) loan is a fixed-income security backed by a commercial mortgage. Sometimes referred to as a conduit loan, these loans are for commercial property types such as malls, apartments, office buildings and factories. A CMBS is created when a financial institution groups all its commercial loans, then sells them in securitized form as a series of bonds. Each of the series of bonds is put together to create segments, with each segment characterized by the level of risk attached to it. They are organized from low-risk and low-yield to high-risk and high-return. The low-risk segments are first to get paid the principal and interest, while the high-risk segment is the last to be paid should the debtors' default.

CMBS stands for commercial mortgage backed securities, and this refers to commercial mortgage loans that are pooled into securities and sold on the secondary market to investors. CMBS loans, also known as conduit loans, are non-recourse and offer low interest rates and relatively high leverage, with LTVs typically going up to 75% for eligible properties. CMBS financing is often ideal for projects that are not a good fit for agency lenders like Fannie Mae or Freddie Mac.

Since CMBS underwriting is more asset focused, lenders are more flexible for borrowers with credit or legal issues, such as a recent bankruptcy. These loans are also great for when a situation requires a faster closing process with less red tape and more focus on the property income than the borrower or the curb appeal of the multifamily project.

CMBS stands for commercial mortgage backed securities, and this refers to commercial mortgage loans that are pooled into securities and sold on the secondary market to investors. CMBS loans, also known as conduit loans, are non-recourse and offer low interest rates and relatively high leverage, with LTVs typically going up to 75% for eligible properties.

CMBS financing is often ideal for projects that are not a good fit for agency lenders like Fannie Mae or Freddie Mac. Since CMBS underwriting is more asset focused, lenders are more flexible for borrowers with credit or legal issues, such as a recent bankruptcy. These loans are also great for when a situation requires a faster closing process with less red tape and more focus on the property income than the borrower or the curb appeal of the multifamily project.

Much like RMBS, commercial mortgage-backed securities are divided into tranches, each of which involves loans of a different credit quality/risk. Lower-risk tranches will be paid first in the case of a loan default, while higher-risk tranches are paid later. Most conduit lenders have between three and eight securitizations per year, but this can vary greatly based on the size of the lender and the size of the loans they issue.

CMBS loans have several incredible upsides. First, these loans are available to a wide swath of borrowers, including those that might be excluded from traditional lenders due to poor credit, previous bankruptcies, or strict collateral/net worth requirements. Plus, CMBS loans are non-recourse, which means that even if a borrower defaults on their loan, the lender can’t go after their personal property in order to repay the debt. In addition, CMBS loans offer relatively high leverage, at up to 75% for most property types (and even 80% in some scenarios).

Perhaps most importantly, CMBS loan rates are incredibly competitive, and can often beat out comparable bank loan rates for similar borrowers. CMBS loans are also assumable, making it somewhat easier for a borrower to exit the property before the end of their loan term. Finally, it should definitely be mentioned that CMBS loans permit cash-out refinancing, which is a fantastic benefit for businesses that want to extract equity out of their commercial properties in order to renovate them, or to get the funds to expand their core business.

The major downside of CMBS loans is the difficulty of getting out the loan early. Most, if not all CMBS loans have prepayment penalties, and while some permit yield maintenance (paying a percentage based fee to exit the loan), other CMBS loans require defeasance, which involves a borrower purchasing bonds in order to both repay their loan and provide the lender/investors with a suitable source of income to replace it. Defeasance can get expensive, especially if the lender/investors require that the borrower replace their loan with U.S. Treasury bonds, instead of less expensive agency bonds, like those from Fannie Mae or Freddie Mac.

In addition, CMBS loans typically do not permit secondary/supplemental financing, as this is seen to increase the risk for CMBS investors. Finally, it should be noted that most CMBS loans require borrowers to have reserves, including replacement reserves, and money set aside for insurance, taxes, and other essential purposes. However, this is not necessarily a con, since many other commercial real estate loans require similar impounds/escrows.

CMBS loans can be used to finance a variety of commercial real estate properties, including retail and office assets. Retail properties such as small strip malls in busy suburban areas and regional shopping malls are eligible for CMBS financing, as long as they have strong, long-term anchor tenants and are managed by experienced organizations. Office assets such as traditional high-rises and low-rises, single-story office parks, medical office buildings, and mixed-use buildings are also eligible for CMBS financing, though only Class A and Class B office properties are generally accepted.

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