What Are the Pros and Cons of CMBS Loans? – Ask The Expert
Agency loans. Bank loans. HUD loans. Life insurance company loans. CMBS loans.
These are some of the most popular loan programs syndicators use to fund the majority of their apartment deals.
Many real estate investors are familiar with the first loan programs but not as many are familiar with CMBS loans.
CMBS loans (commercial mortgage backed securities), also referred to as Conduit Loans, are a type of commercial real estate loan that is secured by a first-position mortgage on a commercial property. These loans are packaged and sold by Conduit lenders, commercial banks, or syndicates of banks.
Although we haven’t secured a CMBS loan, here are the pros and cons you need to know about if you are considering this loan program.
There are two main pros.
First, CMBS loans typically allow for maximum leverage on deals that may typically be viewed as slightly more risky loans by the agencies and balance sheet lenders like banks and insurance companies.
Also, CMBS loans are a good option for deals that one wishes to hold long term as a cash flow investment
There are also two main cons.
First, the major negative to a CMBS loan is the limited flexibility. Once it is sold off as securities in the marketplace, any modification or request needs to be issued though the servicer of the loan who is typically a third party. The servicer makes all decisions off of what exactly the loan documents say, making it very difficult for any changes to be made. Many people find it valuable to be able to talk to the company that issued the loan to work through any changes such as additional capital, changes in the business plan, or trying to sell the property as a loan assumption.
The other con is that the prepayment penalties are typically expensive and you may need to pay defeasance if you decide to prepay.
Overall, you can use CMBS loans for riskier deals and deals with a long-term cash flow play. The downsides to consider are limited flexibility to make changes and higher prepayment penalties.
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