Understanding CMBS Loans for Commercial Properties

If you own a large commercial property that is income producing, such as an industrial building, warehouse, self-storage facility, multifamily rental or retail property, you may be eligible for CMBS loans (Commercial Mortgage Backed Security loans). While they’ve been around for more than 20 years, many businesses don’t know what they are. Here’s a brief overlook so you can determine whether they are the best option for your company.

How They Work

Also known as a Conduit loan, a CMBS has lower fixed rates than traditional real-estate loans. They are available from only the largest national and investment banks and are non-recourse, meaning they’re based solely on collateral. If the borrower defaults, the lender can seize and sell their assets, but can’t seek further compensation despite the cost of the loan. Investors buy interest in the loan and the borrower makes payments to a commercial mortgage servicer who makes payments to the stakeholders.

How to Get One

To obtain CMBS loans, a company must be bankruptcy-remote with a single purpose. This may require a re-write or amendment of the business’s articles of organization, certificate of incorporation or certificate of limited partnership to be sure they have little impact on other entities within the group.

The Fine Print

The documents of a Conduit loan are stricter than a traditional commercial bank loan. The borrower cannot make changes and is less likely to obtain insurance proceeds for business damages. The documents also prohibit the ability to take out secondary loans. However, owners are allowed to transfer their interest to another party without economic penalties.

Repayment Options

Anyone borrowing a Conduit loan is unable to pre-pay during a substantial lock-out period, which could be as long as 10 years. After the lock-out is over, pre-payment can be made without consequence, but only through defeasance. In defeasance, the borrower purchases from a variety of securities that stand in place of the mortgaged property assets able to be seized by the lender. The securities will overlap with the dates payment would have been due.

CMBS loans are a little-known asset to larger single-purpose companies with lower interest rates and no personal guarantees. Offered by large financial institutions and backed by investors, they can be a real help for businesses looking to expand and meet monetary obligations. While you should do your research before applying for any advance to make sure they meet your needs, these loans are a secure way to obtain the financing you need.

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