CMBS Loan Definition
A Commercial Mortgage-Backed Securities (CMBS or conduit) mortgage is a fixed-rate, non-recourse loan product that uses flexible underwriting standards and larger commercial real estate properties as collateral. Several of these mortgages are pooled together, securitized into bonds, and sold to investors. However, this doesn’t affect the borrower; the loan is serviced similarly to any other loan product.
Loan Features / Characteristics
| Recourse | Non-recourse, except standard “bad boy” carveouts |
| Interest-Only Period | Available for some property types with moderate leverage |
| Prepayment Penalty | Yield Maintenance or Defeasance |
| 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 |
| Insurance & Tax Reserve | Usually required |
| Capital Reserves | Usually required unless newer property at moderate to low leverage |
| TI/LC Reserves | Usually required for Office & Retail properties |
Property Requirements
| Property Type | ApartmentRetailOfficeIndustrialHospitality (with limited exceptions for other property types) |
| Occupancy | At least 85-90% for Apartment, Retail, Office, Industrial; 60-70% for Hospitality |
| Location | Primary MSA, expanding secondary markets, limited tertiary markets with low vacancy |
| Loan Amount | $3-5 million minimum, although there may be exceptions |
| Financials | Strong, increasing NOI (excluding unusual expenses) |
| Leases | No substantial near-term lease roll or non-credit single tenants |
Borrower Requirements
| Experience | Preferred, but not required |
| Net Worth | Flexible, but usually approximately 25% of requested loan amount |
| Liquidity | At least 5% of loan amount requested (excluding cash out or down payment) |
| Credit | No recent bankruptcies, foreclosures, short sales, etc. |
Underwriting Requirements
| Maximum LTV/LTC | 75% (dependent on cash flow, location, and property type) |
| Term Length | 5, 7, or 10 years (15 years as a rare exception) |
| Maximum Amortization | 30 years (dependent on property) |
| Minimum DSCR | 1.25x+ (dependent on property type and leverage) |
| Minimum Debt Yield | 7%+ (dependent on property type and leverage) |
Funding/Securitization Process
The financial institution that offers the loans to borrowers will initially fund the loans with its own money at closing, then pool the loans together and securitize them (i.e. turn them into bonds). The rating agencies (i.e. Moody’s, Fitch, Kroll, S&P, DBRS, and Morningstar) then rate the bonds in the pool from investment grade (AAA/Aaa through BBB-/Baa3) to below investment grade (BB+/Ba1 through B-/B3) with a subordinate, unrated class below the lowest rated bond class. These ratings are based upon the pool’s average LTV and DSCR, the distribution of the loans’ LTVs and DSCRs, the property types in the pool, the properties’ ages and lease expirations, the geographical location of properties, the various loan sizes, and total number of loans. After rated, the bonds are then sold to large investors for prices corresponding to the class of the bonds. Once the bonds are sold, the money the lender initially loaned to the borrowers is replenished, less an amount designated for risk retention, unless those strips are sold to “B-piece” buyers.
Post-Closing/Servicing
A pooling and service agreement (PSA) creates an established standard by outlining the responsibilities for each servicer. A Trustee is responsible for supervising the master and special servicers, ensuring that they act in accordance with the PSA. The Master Servicer is responsible for day-to-day loan operations including mortgage payments, escrow accounts, financial statements, site inspections, and consent requests. All sub-performing or non-performing mortgages are sent to special servicing. Special servicers are responsible for work-outs including extending maturity dates, restructuring loans, appointing receivers, foreclosures, and managing and selling the foreclosed real estate. Sometimes master servicers subcontract specific responsibilities to a primary or sub servicer in order to uphold the PSA when they need additional assistance.
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.
