Welcome to another easy-to-digest real estate problem-solving. Today, I thought to address the problem of CMBS financing for commercial properties across the United States.
With a well-developed niche in CMBS loans, cash-flow issues, depreciation, and more, the advisors at IPG are experts in leveraging commercial mortgage-backed securities as a tool for financing commercial properties.
So, let’s start.
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What is CMBS? If you were ever involved in buying and selling real estate, then you’ve probably heard of commercial mortgage backed securities – or CMBS market – before.
A CMBS loan is a fixed-income investment backed by commercial mortgage real estate properties. CMBS market offers many advantages for both the borrowers and the investors involved in this process.
As a borrower, you can earn low fixed-rate terms and gain access to high-leverage financing that might not be available otherwise.
But, how do you take out mortgage backed securities?
Besides the mortgage backed securities definition, we have to discuss dome of the advantages or disadvantages. Why choose CMBS mortgage securities over a traditional commercial loan?
Those are exactly the questions this article will set out to answer, but I have to highlight that IPG does not offer commercial real estate loans. My team can help you acquire the ideal property, make a wise investment, and save on lease expenses.
What Are Commercial Mortgage-Backed Securities
CMBS stands for Commercial Mortgage Backed Securities. CMBS are also called Conduit Loans, referred to as first-position mortgages on commercial property.
Loans on commercial mortgage backed securities can be made on all asset classes of commercial real estate.
Once an individual CMBS is made, they are packaged together by Conduit Lenders, commercial and investment banks, and sold as bonds to commercial real estate investors.
Mortgage-backed securities can be a good option for lenders because when the loan is sold, it’s off the lender’s balance sheet, freeing his liquidity to provide more loans.
CMBS is also a way to invest in commercial real estate at higher yields than what is generally offered, as well as many other fixed-income products.
Mortgage-Backed Securities Structure
Mortgage-backed securities are usually structured (securitized) into three of four tranches, or levels. These CMBS tranches rank from:
- Assets of highest quality risk
- Assets of lowest quality risk
- Assets with mixed quality risk
By securitizing commercial mortgage-backed securities and layering tranches, the lender can balance any potential losses, while offering a guaranteed yield to the investor.
CMBS Market Requirements For The Lender
Commercial mortgage backed securities will ultimately be packaged and securitized, offering a fixed return to investors.
Because of this guarantee, lenders take a more conservative and risk-averse attitude when underwriting mortgage-backed securities rates for the loan.
Due diligence for the mortgage backed securities usually includes the following:
- In-place income-based cash flows (future rent increases and lease-ups are not projected)
- Closely scrutinized leases to ensure real market value rents (reducing the chance of a tenant lease default)
- Loan-to-value (LTV) not greater than 75%
- Debt-service-coverage-ratios (DCSR) of (at least) 1.25
- Borrowers cash equity invested in the property against which the loan is issued
Key Features Of CMBS Loans
Both borrowers and loan investors should be aware primarily of the six key features of commercial mortgage-backed securities when opting for a CMBS loan:
- Commercial mortgage-backed securities normally last between 5 and 10 years but can be amortized for over 25 to 30 years.
- Commercial mortgage-backed securities are non-recourse, so the collateralized property (and the income stream it yields) is the only recourse the lender has.
- Prepayment penalties in CMBS are common because the lender looks to be compensated for the shorter loan term and with the lower interest income.
- CMBS yield maintenance is a borrower prepayment penalty structure that allows investors to receive the same yield even if the loan is paid off early.
- Defeasance is the CMBS market substitutes the original commercial property with alternative collateral (bonds or other securities that generate the same cash flow).
- The assumption of commercial mortgage-backed securities is common and allows the borrower to sell its collateralized property, so the new buyer can take over the remaining loan obligation.
It’s normal for lenders to do what they can to minimize risk by using conservative lending practices.
CMBS investors can experience losses if too many loans are within a securitized package in the middle of a weak CMBS market.
Even with a low LTV, lenders may still find it difficult to sell a foreclosed property for more than the value of the loan.
Following the global financial crisis of 2008, the CMBS market almost disappeared, then reemerged as an alternative form of lending, allowing the commercial real estate market to recover.
The start of securitization was the benign aspect of the financial funding system and mortgages. The 1980s and 1990s saw the market grow to encompass other income-producing debt obligations, such as ABS and commercial mortgage-backed securities (CMBS).
The concept of CMBS of today isn’t much different than mortgage-backed securities used two decades ago, but rather than having just mortgages mixed into one pot, business loans are now added in there as well.
The success of the CMBS market depends entirely on the purchasing power of the people through which, if disturbed, could cause a large ripple effect.
Whichever you choose to consider, traditional loan or the one with commercial mortgage-backed securities – proper knowledge of market conditions and market trends should be part of your due diligence as a potential investor.
An IPG membership unlocks access to in-depth research on commercial real estate in markets across the U.S. with detailed property data, as well as sales, ownership, debt, and lease information. So, let’s talk.