Using CMBS Conduit Loans for Commercial Real Estate
As a commercial real estate investor, you have to find capital to keep your business running. Without the money to invest in properties, you can’t make money. It’s the age old tale of needing money to make money. Luckily, you have options, like CMBS conduit loans. However, you should become familiar with any loan option before you begin pursuing it.
What Is a Conduit Loan?
A commercial mortgage backed security conduit loan is a package of a commercial mortgage and other similar loans that is held in a trust as collateral for a mortgage backed security. Technically, this is known as securitization.
How Are They Beneficial?
Conduit loans are beneficial because they have a rather large market. In addition, they offer liquidity for the commercial mortgage market. They also provide lower rates than traditional loan options, which are based on factors like location of the property, the quality of tenants, management and property cash-flow. The most attractive thing about this type loan is they offer higher leverage and lower fixed rates than a traditional loan. In addition, the ownership of the loan is transferrable without financial consequences.
How Do They Work?
They are considered a fixed-rate, permanent loan and based on standardized underwriting and document requirements. The application process is fairly standardized. You won’t have much room for negotiation. They do also usually include restrictions on secondary commercial financing. The loan term is most often ten years. However, as mentioned, ownership is transferrable, depending on the terms from the lender. There are periods where prepayment is forbidden. When prepayment is allowed, it must be done through defeasance.
Where Can I Get One?
Smaller banks typically do not offer this type of loan. Common lenders include large banks, along with pension companies, life insurance companies and financial services firms. Investment banks also often offer this type of loan. The lender will hold the loan until it is securitized at which point the interests are sold. At this point, you make your payments to a commercial mortgage servicer who then manages the money interests instead of the lender. This sale usually happens within two years.
When you are trying to raise capital for commercial real estate investing, you need to consider every option available. Depending on your circumstances, you may find conduit loans are the perfect fit for your needs. However, you do need to consider all the aspects of this type of loan to ensure that you are comfortable with them because this loan comes with a fairly long term of ten years.