| Detail | Explanation |
|---|---|
| Also called | Conduit loan |
| Held by | A securitization trust, usually taxed as a REMIC |
| Sizing tests | Debt yield, DSCR, and loan-to-value |
| Risk retention | Sponsor or qualifying third party retains at least 5% of credit risk |
| After closing | Master servicer for routine matters, special servicer for defaults and workouts |
| Common exit restriction | Defeasance or yield maintenance |
How does a CMBS loan work?
A conduit lender closes the loan, usually a fixed-rate permanent loan, on standardized documents and holds it briefly. The loan is then pooled with other commercial mortgages and sold to a trust. The trust issues bonds in tranches, from senior classes with the first claim on payments to a subordinate first-loss class. Investors in each class are paid from the borrowers' monthly payments.
CMBS trusts commonly elect treatment as a real estate mortgage investment conduit, or REMIC, under the Internal Revenue Code. Treasury regulations require that substantially all of a REMIC's assets be qualified mortgages and permitted investments. That tax status shapes how the loan behaves for the rest of its term.
Why are CMBS loans hard to modify?
Under the REMIC regulations, if a loan in the trust is significantly modified outside the listed exceptions, the modified loan is treated as newly issued, and the deemed disposition of the original loan becomes a prohibited transaction. The exceptions include changes occasioned by default or a reasonably foreseeable default, an assumption of the loan, and a waiver of a due-on-sale or due-on-encumbrance clause. The regulations also permit a defeasance that substitutes government securities as collateral, when the loan documents allow the substitution and the other conditions in the regulation are met.
In practice, this is why a performing CMBS borrower cannot simply call the lender to extend the maturity or add proceeds. The servicer works within the pooling and servicing agreement and these tax rules. Prepayment is usually handled through defeasance or yield maintenance.
What does risk retention require?
Federal credit risk retention rules require the sponsor of a securitization to retain an eligible vertical interest of not less than 5%, an eligible horizontal residual interest equal to at least 5% of the fair value of all ABS interests, or a combination that totals at least 5%. For CMBS, the rules let up to 2 qualifying third-party purchasers hold the horizontal residual interest in place of the sponsor, if they pay cash, review the credit risk of each loan, and meet independence conditions.
For a borrower, the practical effect is that a first-loss investor reviews the loan before the securities are sold. Clean third-party reports, a supportable rent roll, and a consistent trailing 12 help a loan clear that review.
Worked example
In this hypothetical example, a stabilized property produces $1,200,000 of net operating income and has an appraised value of $20,000,000 at closing. The lender's tests are assumed for illustration: a minimum 9.00% debt yield and a maximum 65% loan-to-value. The loan is sized to the lower result. Check other structures with the debt yield calculator.
| Test | Calculation | Maximum loan |
|---|---|---|
| Debt yield at 9.00% | $1,200,000 / 9.00% | $13,333,333 |
| Loan-to-value at 65% | $20,000,000 x 65% | $13,000,000 |
| Loan amount | Lower of the 2 tests | $13,000,000 |
Sources
Common questions
Are CMBS loans non-recourse?
Most CMBS loans are non-recourse, meaning the lender looks to the property for repayment. They still carry carve-out guarantees for acts such as fraud, unauthorized transfers, and bankruptcy filings. See non-recourse loan for how those carve-outs work.
Can I pay off a CMBS loan early?
Usually only through defeasance, yield maintenance, or during an open window near maturity, depending on the loan documents. Many CMBS loans also lock out prepayment for an initial period after securitization.
Who do I talk to after my CMBS loan closes?
Routine requests such as reserve releases and some consents go to the master servicer. If the loan defaults or a default becomes reasonably foreseeable, it can be transferred to the special servicer, which handles modifications and workouts.
How does a CMBS loan compare with a bank or life company loan?
CMBS lenders typically size on cash flow and offer non-recourse terms on a wide range of properties, but post-closing flexibility is limited. Banks and life companies hold loans on balance sheet and can be easier to modify. The CMBS vs bank vs life company loans guide compares them. To see which fits your property, submit the deal.
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