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What Are CRE CLOs?
CRE CLOs are a series of short-term, floating-rate loans issued against a pool of commercial properties that are in transition.
How Do CRE CLOs Work in Commercial Real Estate?
A CRE CLO is a commercial real estate collateralized loan obligation. CRE CLOs are a financing vehicle with short-term, floating-rate loans issued against a pool of commercial properties in transition. Transitional assets can include anything from multifamily properties undergoing major renovation, or an office property with considerable near-term lease turnover.
While other securitized products such as CMBS loans are mostly static, CRE CLOs are actively managed by an asset manager. They typically have a reinvestment period of five years. During this period, managers can add or remove loans from the portfolio. As managers are more in control of the aggregated loans, there’s an added layer of security to CRE CLOs when compared to a CMBS product.
CLOs are structured as a series of tranches, including:
Senior tranches (rated AAA and AA)
Mezzanine tranches (rated A, BBB, and BB)
Equity tranches
What is a CRE CLO?
A CRE CLO (Commercial Real Estate Collateralized Loan Obligation) is a type of loan product that is used to finance commercial real estate projects. It is a type of securitization, meaning that it pools together multiple loans into a single security that is then sold to investors. The loans are typically secured by the underlying real estate, and the terms of the loan are typically set for a period of three years. The loan size is typically around $24 million, and the interest rate is typically a floating rate.
For more information on CRE CLOs, please see this article from CommercialRealEstate.Loans.
It is important for borrowers to stay up to date on the latest changes in the CRE landscape. To do this, borrowers can use a Commercial Mortgage Alert to get better loan terms. For more information on this, please see this article from CommercialRealEstate.Loans.
How do CRE CLOs work?
CRE CLOs are a type of loan that allows a commercial real estate owner to borrow against the equity in their property. They are similar to home equity lines of credit (HELOCs) found in residential real estate. CRE CLOs typically involve a loan size of $24 million, with 30 loans per portfolio, a floating interest rate, and a typical term of 3 years.
The loan can be used for a variety of purposes, including growing your business by hiring new employees, obtaining new inventory, financing property improvements, or even purchasing a new piece of real estate.
For more information, please visit What Are CRE CLOs? and Commercial Equity Lines of Credit in Commercial Real Estate.
What are the benefits of investing in CRE CLOs?
CRE CLOs (Commercial Real Estate Collateralized Loan Obligations) are a type of investment vehicle that pools together commercial real estate loans and then issues bonds backed by the underlying loans. Investors in CRE CLOs benefit from the diversification of the underlying loans, as well as the potential for higher returns than other types of investments. Additionally, CRE CLOs are typically structured with a fixed-rate coupon, meaning that investors can benefit from the stability of a fixed-rate return.
What are the risks associated with investing in CRE CLOs?
The risks associated with investing in CRE CLOs include the possibility of decreased net operating income, which could lead to the owner being liable to make principal and interest payments or even, at some point, pay back the entire loan prematurely. Additionally, income taxes, the amount of money to be borrowed, and the various financing alternatives available should be studied thoroughly prior to making a decision.
For more information, please see What Are CRE CLOs? and Cash On Cash Returns: Calculator, Risks Involved.
What types of investors typically invest in CRE CLOs?
CRE CLOs are typically invested in by institutional investors, such as pension funds, insurance companies, and other large financial institutions. These investors are attracted to the potential for higher returns and the diversification benefits of investing in CRE CLOs. Conduit lenders are able to spread the risk associated with the loan across multiple investors through the CMBS market, which is why they often offer lower interest rates than banks and other types of lenders. Source 1, Source 2.
What are the tax implications of investing in CRE CLOs?
Investing in CRE CLOs can have a variety of tax implications, depending on the investor's individual situation. Generally, investors should create an exit strategy and begin the tax planning process before they make an commercial real estate investment-- not after. This is because capital gains taxes can be a significant factor in the overall return on investment. For instance, investors may be able to take advantage of a 1031 exchange, or even defer taxes via investing in the Opportunity Zones program. For more information, please see Capital Gains Taxes in Commercial Real Estate.
Cash flows follow a type of waterfall structure. The most senior tranche is paid first, and any equity tranche receives its distribution last. Any losses in the portfolio are first felt by the most junior tranches.
General CRE CLO Loan Terms
Property type | Transitional |
Loan size | $24 million |
Loans per portfolio | 30 |
Interest rate | Floating |
Typical term | 3 years |