CMBS Loan Application Process
Published 09-29-2018

Getting an Application

If you are in agreement regarding the rate that was quoted to you by the CMBS Lender, the next step is for them to issue you an application. Typically, in order to be issued an application, the following additional items are needed:

  • 3 years historical operating statements on the property
  • Annual budget for the current year
  • Copy of the franchise agreement and any proposed PIP (if hospitality)
  • Purchase price (if purchase)
  • Cost basis (i.e. purchase price + capital improvements) and loan balance (if refinance)
  • Requested loan amount, including schedule of sources and uses

Keep in mind that some of these items may be reviewed during the underwriting period rather than before the application is written, depending on the property, sponsor, and lender, so may not be required until due diligence has begun and third party reports are ordered.

When turning in your application, plan on paying a deposit of $35,000+ (depending on the size of the property, number of properties, and any additional third party reports or extensive legal work that may be needed). Anything not used is refunded.

Underwriting/Due Diligence/Pre-Closing

Once you have signed your application and returned it with your deposit, the underwriting process begins. You will typically receive two separate checklists (one legal and one financial/third party due diligence) that are handled simultaneously by the underwriters and legal team. Although requirements may vary, expect to see some of the following items on your checklists:

Financial Due Diligence:

  • 5 years historical operating statements on the property
  • Explanation of any declines or significant variances in the financial statements
  • Current rent roll
  • Historical occupancy reports for previous 3 years (monthly for apartments and hotels)
  • Standard lease form
  • Capital expenditure schedule going back at least 5 years
  • Management company agreement and resume/bio
  • 3 years of real estate tax bills
  • Accounts receivable aging report
  • Information on existing debt (if refinance), including existing lender contact information and current loan payoff
  • Purchase & Sale Agreement (if purchase)
  • Schedule of Sources & Uses for proceeds
  • Any existing third party reports (i.e. appraisal, engineering, environmental, O&M plan)
  • Most recent STR report, franchise agreement, and most recent franchise inspection report (if hospitality)
  • Comfort letter and Tri Party Agreement (if hospitality)
  • Current balance sheet, most recent federal tax return, and W-9 for borrowing entity
  • Personal financial statement, most recent federal tax return, and W-9 for carve-out guarantor(s)
  • Real estate resume for carve-out guarantors

Third Party Reports/Due Diligence:

  • Appraisal
  • Property Condition / Engineering Report
  • Environmental Report
  • Credit Report(s) on borrower and carve-out guarantor(s)
  • Zoning Report
  • Seismic report (if applicable)
  • ALTA Survey (unless already furnished)
  • Title Insurance (borrower chooses; must be one of the larger providers)
  • Property insurance policies and premiums

Legal Due Diligence:

  • Organizational Documents (Certificate of Formation/Articles of Organization, Operating Agreement/By-laws, Certificate of Good Standing, member consents) for both member and managing member (if applicable)
  • Copies of all tenant leases (or example lease if apartments)
  • Estoppel certificates for all commercial tenants
  • Subordination, Non-Disturbance and Attornment (SNDA) Agreements for any tenants: » occupying 10,000+ sq.ft.; » 20%+ of the net rentable area of the property; or » of record (i.e. with recorded leases)
  • Copies of any ground leases (if applicable)
  • Ground lessor’s Estoppel & SNDA (if applicable)
  • Certificate of occupancy
  • Legal searches (UCC, judgment, lien, litigation)
  • Municipal searches
  • Borrower’s counsel opinion letters
  • Loan document comments

Expect to have the property analyzed in ways that may be different than how you see your property or organize your reports. This is not to say that the lender disbelieves the Borrower’s reporting, but rather that specific standards are mandated by the rating agencies and FDIC (newly appointed overseer of CMBS shops). Keep in mind that the more quickly the items are turned in, the faster the loan closes.

CMBS Loan Features

These following are the typical loan features of a CMBS loan, but are subject to change depending on market conditions or regulatory changes:

Recourse Non-recourse, except for “bad boy” carve-outs
Term Length 5, 7, or 10 years (with a rare exception for 15 years)
Amortization Up to 30 years
Interest-Only Period Available in some circumstances for strong, low-leverage properties
Prepayment Penalty Yield maintenance or defeasance structure
Loan Assumption Available, typically with a 1% fee
Loan Servicer Securitizer, or may be transferred to a third party
Cash lock-box Yes
Secondary financing No, unless mezzanine is arranged at the time of origination

Loan Tips

  • If you are not sure what something means, ask! If you don’t, you could get easily confused or uncomfortable with the process.
  • Ask for an estimate of potential closing costs up front and to be notified if/when that changes. Know that underwriting fees (which go to the lender) can be negotiated down somewhat, especially if you promise to be responsive and timely in getting the information they need.
  • Disclose any potential credit issues up front (i.e. bankruptcy, foreclosure, short sale, liens, judgments, charge-offs, etc.) on the borrowing entity, sponsors, or sponsor holdings. You don’t want to have paid $35,000+ dollars in deposits only to find out later you don’t qualify for the loan because of a previous credit issue (which WILL come out in the legal and/or credit searches). Also, if you disclose up front, there may be work-arounds to still get you qualified for the loan. If you don’t disclose it and the lender finds out later, they may pull the plug on the loan completely as this is typically considered a character issue, and a big no-no.
  • The borrower must have their own loan counsel to execute opinion letters and review loan documents, so it is very important to have an attorney with extensive experience in CMBS transactions. If you hire an inexperienced attorney, it could cost thousands of dollars in additional legal fees as they will try to change non-negotiable items on the extremely lengthy loan documents and it will take longer or they will be unable to do the opinion letters. We usually recommend the larger firms that don’t have a conflict with the lender (i.e. Alston & Bird, King & Spalding, etc.) or if they do have a conflict, ask them for a recommendation. Make sure the attorney has done at least 50 closings in the last 5 years.
  • Ask to see the lender’s cash flow analysis of the property to double-check for any errors they may have made or one-time or capital expenditures that were included in the expenses. This could keep you from being re-traded later once they catch the error. If there are numbers you don’t agree with, explain why and see if they can be changed without causing issues with underwriting standards.
  • Double-check the assumptions under which your pricing is given in the application. Sometimes lenders are too aggressive with their debt yield, DSCR or LTV assumptions on their applications (especially if they haven’t totally completed the financial analysis), which can lead to you being re-traded later when the numbers are finalized. Make sure they are comfortable with the NOI they have calculated and ask how much of a buffer you have with the NOI as well as the debt yield, DSCR, and LTV before you get bumped up to the next higher pricing bracket. Also, ask what kind of cap rate they assumed on your property for the LTV and where they pulled it from, then double check that number with the CBRE cap rate survey to make sure it’s in the realm of possibility. Also see if you can get an experienced broker to tell you how much your property is (realistically) worth, or how much the cap rates for your property type are running in the area. Remember, only ONE of the assumptions in the application need be wrong to get you into higher pricing, so you want to reduce that risk as much as possible.
  • If you are asking for cash out, make sure you have legitimate commercial uses for the money that you are asking for above the refinance costs and loan payoff.
  • Understand that although there are some loan document points that can be negotiated, there are many items in the loan documents that cannot be negotiated or changed because they are federally mandated or put there to protect the bond investors, which end up holding the loan after it is sold. Having an experienced attorney will help you sort out which if these points are negotiable. As a general rule, you usually don’t want to pick more than about 6 things, or the legal bills could start racking up on the borrower and lender side (both of which the borrower has to pay for).
  • If you know of properties that are comparable to yours and reflects the value that you need for your property (especially if they are recent sales), make sure to put those comparables in a list (as well as any info you have on them), and supply them to the appraiser when he comes for the site visit to assess your property. Also make sure you casually mention the value you need to be at. Although not guaranteed, both of these tactics may help reduce some of the risk of the appraisal number coming back lower that what is needed.
  • Get your items in quickly. It helps reduce the risk of the interest rates climbing on you while you’re waiting to close.
  • Only choose this loan product if you know you’re keeping the property for the length of the loan or you have attractive enough financing that someone will want to assume it in the future, because the prepayment penalties on this loan product are very high unless you prepay it close to the maturity date.
  • Get more than one CMBS quote and pick the lender you feel most comfortable with, but make sure the parameters for the quote are similar (i.e. LTV, DSCR, debt yield, etc.).

About the Author

Leanne is a JD/MBA and works as a Managing Director for Commercial Loan Direct, specializing in large balance transactions, portfolio loans, and complex financing structures. When not negotiating the best deals for her clients, you can find Leanne in the yoga studio or snowboarding up in the Rockies.