Conduit Loans
CMBS conduit loans are conventional fixed-rate, first mortgage loans secured by stabilized income-producing commercial real estate properties that are leased to tenants. Once closed, CMBS conduit loans are pooled together by Wall Street investment banks and sold as securities to investors. The borrower is not involved with this process.
The market for CMBS conduit loans started in 1992. The industry peaked in 2007 when $228 billion of CMBS conduit loans were originated in the United States. More recently, the annual volume of CMBS conduit loans closed is $75-$100 billion/year, representing roughly 20% of all commercial loans closed annually in the United States. The CMBS conduit loan market is a significant source of financing for income-producing real estate.
All CMBS conduit loans are non-recourse (no personal guarantees), and CMBS conduit loans allow for unrestricted cash-out on refinances in which the new CMBS conduit loan amount is greater than the loan balance being paid off.
For example, if a shopping center worth $10 million is refinanced with a 75% loan-to-value CMBS conduit loan ($7.5 million) and the existing loan balance is $5 million, the $2.5 million of excess loan proceeds are provided to the borrower without restriction on what the excess funds can be used for. Many commercial lenders do not allow for unrestricted cash-out.
Regarding non-recourse, most commercial lenders require that a commercial loan be 100% guaranteed personally by all of the individual owners of the property. In the event of a default and foreclosure, if the lender does not recover the full loan balance through a sale of the property or the loan, each individual is personally responsible for repaying the shortfall, and the lender can easily get a judgment to compel the individuals to pay. With a CMBS conduit loan, the individuals do not have any personal liability to repay the loan in the event of default and foreclosure
The following types of leased income-producing real estate are eligible for CMBS conduit loans:
- Multifamily
- Manufactured Housing Communities
- Retail
- Office
- Industrial
- Hotels
- Self-Storage
Within these categories, the following sub-categories are also eligible:
Eligible Multifamily: Student Housing, Age-Restricted (Seniors) Multifamily, Furnished Multifamily, Multifamily with Section 8 voucher tenants, Multifamily with HAP contracts, and Multifamily with IRS Section 42 tax credits.
Eligible Manufactured Housing Communities (MHCs; also known as Mobile Home Parks): MHCs with up to 20%-25% landlord-owned homes and MHCs with single-wide homes.
Eligible Retail: Malls, Anchored Multi-tenant Retail, Neighborhood Multi-tenant Retail, Unanchored Multi-tenant Retail, Single Tenant Retail (with long-term lease — 5-plus years — to a credit tenant and high likelihood of lease renewal).
Eligible Office: Multi-tenant Suburban Office, Multi-tenant Urban Office, Single Tenant Office (with long-term lease — 5-plus years — to a credit tenant and high likelihood of lease renewal), Government Office with no lease cancellation clauses.
Eligible Industrial: Multi-tenant Warehouse/Distribution, Multi-tenant Light Industrial, Single-tenant Industrial (with long-term — 5-plus years — to a credit tenant and high likelihood of lease renewal), Multi-tenant office/warehouse (office in front/warehouse in rear).
Eligible Self-Storage: Independent and Franchised self-storage, climate-controlled and non-climate-controlled.
Eligible Hotels: Full-service, Select-service, Limited-service, and Extended-stay hotels that are mid-scale and higher franchised hotels as defined by Smith Travel Research (click here to pre-qualify a hotel for a CMBS conduit loan). Independent hotels located on/near beaches and Boutique hotels in urban/suburban locations with ADR over $100/night.
Construction and substantial rehabilitation projects are not eligible for CMBS conduit loans.
Healthcare (defined as real estate with meals and health services provided) are not eligible for CMBS conduit loans. Properties with well below-market occupancy are not eligible for CMBS conduit loans (but may qualify for a bridge loan).
CMBS conduit loans are underwritten solely based on the income generated from the property being financed (i.e., the most recent 12 months’ income from tenants that occupy the property less property operating expenses during the same period).
CMBS conduit loan underwriting does not consider any income the property owner earns from other sources, such as salary income or net income from other real estate sources.
CMBS conduit loans are available for loan amounts from $2 million to $100-plus million. Loan amounts from $1 million-$2 million are available on a case-by-case basis.
Yes. In instances where the CMBS conduit loan proceeds are insufficient to pay off the existing debt in a refinance or the sponsor desires 5%-10% more leverage, a mezzanine loan can be seamlessly added to achieve the desired loan proceeds.
Class A, Class B or Class C properties are eligible for CMBS conduit loans.
Classifying commercial property is subjective, but some general criteria that would qualify for a CMBS conduit loan include the following: less than 20 years old or recently renovated; limited or no deferred maintenance; and/or competitive within its market. The best way to qualify a property is to contact us with the property address.
CMBS conduit loans are available for properties in all 50 states and Puerto Rico. Properties must be located in major metro, secondary or tertiary locations.
Properties located in a rural area (except for hotels located on a major highway) are generally ineligible for CMBS conduit loans. Determination of a rural area is subjective, but one general criteria is a population of less than 20,000 persons.
Please contact us with the property address to determine if the property is ineligible for a CMBS conduit loan due to a potential rural location.
The majority of the costs to obtain a CMBS conduit loan are the fees for an appraisal, property condition report, Phase I environmental site assessment, and lender’s legal charges.
In addition, typical commercial real estate loan closing costs include title insurance costs, survey charges, and borrower counsel fees. The typical expense deposit to cover these costs is $35,000-$50,000. Should the borrower cancel the loan during the underwriting and closing process, any unspent deposit will be returned to the applicant.
If costs are a concern, please consider our Fixed-cost program. Contact us for more information about this program.
The prepayment penalty for a CMBS conduit loan is Treasury Defeasance or Yield Maintenance. To learn about Treasury Defeasance, visit defeasewithease.com.
All CMBS conduit loans are fixed-rate and have a 5-, 7- or 10-year loan term. CMBS conduit loans amortize on long 25- or 30-year schedules and can have interest-only payments during the first few years of the loan term. CMBS conduit loans close fast — in as little as 30 days — and all CMBS conduit loans are assumable.
CMBS conduit loans can be approved and closed with borrowers who have credit blemishes such as prior loan defaults and property bankruptcies as long as the individual who owns the property being financed through a CMBS conduit loan did not act in “bad faith.” In addition, individuals with poor personal credit scores can qualify for CMBS conduit loans because the underwriting and approval for a CMBS conduit loan is based primarily on the income from the property being financed, not the credit of the individual owner.
CMBS conduit loans are conventional fixed-rate, first mortgage loans secured by stabilized income-producing commercial real estate properties that are leased to tenants. Once closed, CMBS conduit loans are pooled together by Wall Street investment banks and sold as securities to investors. The borrower is not involved with this process. The market for CMBS conduit loans started in 1992. The industry peaked in 2007 when $228 billion of CMBS conduit loans were originated in the United States. More recently, the annual volume of CMBS conduit loans closed is $75-$100 billion/year, representing roughly 20% of all commercial loans closed annually in the United States. The CMBS conduit loan market is a significant source of financing for income-producing real estate.