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Conduit Loans Overview
Conduit Loans, also known as CMBS Loans (commercial mortgage backed security), play a vital role when it comes to commercial real estate financing. Conduit loans are secured by a first-position mortgage on a income producing commercial property which in most cases is cash-flowing and stabilized.
There are many commercial property types that qualify for a conduit loan, including: multifamily, retail, office, industrial and hotel properties. Each of these property types have sub-categories that are also financed by CMBS lenders. For example, student and seniors housing would fall under the multifamily umbrella.
The conduit underwriting process is relative to the asset type being financed. The property and sponsorship information needed to create a credit memo for a lenders credit committee is somewhat boiler-plate in comparison to other loan processes.
Generally, it takes 30-45 days to close a conduit loan. After the loan is closed, the issuing conduit lender will look to package and sell the loan into a pool. This process is called securitization, whereby the loan is sold to investors and carries a specific rate of return, also known as the Yield. During the securitization process, hundreds and at times thousands of similar loans varying in size, interest rate and property types are pooled together.
CMBS investors have the ability to invest in various geographic locations, property types and the credit rating, assessed by credit rating agencies. There are several different tranches from which investors can choose to invest their capital. Each tranche carries a specific risk factor and rate of return for that associated risk.
When looking at a conduit loan as a financing option for your commercial property, it is important to understand the differences between a conduit loan and a portfolio loan, which is generally offered by commercial banks. Let’s take a look at, both, the benefits and drawbacks of conduit financing.
(212) 353-2800
You can also email us for more information on our conduit financing programs.
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New York, NY 10004
Benefits of Conduit Loans:
During the past 10 years, CMBS loans have become a very popular source of capital for commercial real estate investors looking for higher leverage, 30-year amortization schedule and a longer loan term than what most conventional banks can offer. Conduit lenders allow up-to 75% LTV in senior debt, giving investors the opportunity to preserve their own capital when acquiring or refinancing a commercial property. The LTV could be pushed as high as 85% with the incorporation of mezzanine debt.
Cash out refinance is a lot easier with a CMBS lender than a conventional bank because of various rules and regulations that are imposed on the banking industry. So in essence, conduit loan borrowers are rewarded for creating property value and in return, can pull out their equity along with additional cash on top of that. Liquidity remains at the forefront of many active real estate investors and conduit loans provide the means to accomplish that goal.
CMBS lenders can also offer full-term interest only loans which are viewed favorably by some real estate investors looking for cash-flow. In a rising property value environment, investors have become increasingly bullish with interest-only CMBS financing.
Interest rates for CMBS loans are highly competitive and the loan is generally non-recourse, with standard “bad-boy” carve-outs. Rates are often fixed for 10-years, however, 5 and 7-year term loans are also available, with corresponding interest rates for that product. Lenders generally use a specific spread over the corresponding Swap or US Treasury benchmark to determine the interest rate for the life of the loan. 10-year term loans remain the preferred choice of most borrowers because it offers them market and interest-rate protection on top of financial savings in having to refinance every 5 years.
Another advantage to CMBS financing is that it provides loans in secondary and tertiary markets across United States, including Puerto Rico and Alaska. Unlike many portfolio lenders that are only comfortable making loans to borrowers that are in their hometown, CMBS lenders can facilitate a loan for a borrower located in New York City who is buying a property in Florida or Arizona.
In addition to some of the benefits listed above, conduit loans can also be assumed. This flexibility allows commercial real estate owners to sell their property to prospective buyers who will then assume the existing mortgage without defeasing the current loan. This is highly favorable in a tight lending environment or one where interest rates are unfavorable. The lenders assumption fee varies and is negotiated with the borrower at the loan document stages prior to the closing of the loan. This fee can range between .50% to 1% of the loan amount.
Finally, conduit lenders offer flexible underwriting guidelines, allowing novice commercial real estate investors to be financed creatively where a local savings bank may have been reluctant to lend. An experienced commercial mortgage broker can assist in facilitating and structuring a non-recourse loan that meets and exceeds your financing objectives.
With the current historically low rate environment and competitive lending landscape, more borrowers are locking in favorable interest-rates by utilizing the 10-year term conduit loan platform.
Now that we have discussed some of the benefits to conduit loans, let’s take a look at some of the disadvantages.
Drawbacks of Conduit Loans:
CMBS loans often come with more stringent prepayment provisions such as Defeasance and/or Yield Maintenance to protect the guaranteed yield of the bond holders. Should you wish to prepay the loan ahead of maturity, you have to offer the bond investors an alternative security, which in most cases is a U.S. Treasury Bond, to replace the collateral with another. This allows the bond holders to continues to receive the yield on their investment.
Another perceived wrinkle in CMBS financing is that subordinate financing is usually restricted. Once the loan is closed and sold into a pool via securitization, the borrower can no longer add a layer of additional financing. In this case, commercial real estate investors who are in the business of creating value cannot capitalize on borrowing additional funds until the current loan is repaid or refinanced ahead of maturity, which can be costly at times.
Volatility and interest rate risk could also be a setback. Unlike many portfolio lenders that keep loans on their balance sheet and are able to rate-lock at application, the interest rate on a conduit loan is not fixed until the loan closes. In most cases, this is the day prior to or on the actual day of closing when the rate-lock take places and the interest-rate is fixed for the duration of the loan term. Any market volatility can impact the interest rate while the loan is in underwriting or in due-diligence stages.
When financing commercial real estate, owners and investors should consider all available options. Many times obtaining CMBS financing makes sense, and in some cases it may not.
Documents Required for Commercial Properties
- Current Rent Roll
- Most recent 2-years and YTD income and expense statements (P&L)
- Capital Improvement Summary (CapEx Schedule that displays any noteworthy capital expenditures such as HVAC, roof and/or parking lot repairs)
- Sponsor Resume (includes list of properties owned and managed)
Documents Required for Hotels
- Most Recent trailing (12) month income and expense statement ( P&L)
- Prior (3) years of income and expense statements
- Most Recent STAR Report
- Historical Occupancy Report
- Summary of Franchise Agreement
- Sponsor Resume
Multifamily
Shopping Centers
Hotels
Office
Warehouse
Industrial
Self Storage
Assisted Living
Single Tenant
Participants of Conduit Loans:
Primary Servicer:
This could be the role of the loan originator or mortgage banking company that facilitated the loan. The primary servicer is the party directly in touch with the borrower, assuming the loan is in good standing.
Master Servicer:
The master servicer may sub-contract some of the loan administrative duties of the primary servicer. In this capacity, the master servicer manages the flow of payments and performance-related information of the property. Again, assuming there is no default, the master servicer is directly in touch with the borrower.
Special Servicer:
In case there is a trigger event which sometimes means some type of default (monetary or maturity), the loan will be transferred to the special servicer who will be responsible in addressing further curing actions with the borrower. In addition, the loan assumption process is the responsibility of the special servicer.
B-Piece Buyer / Directing Certificate Holder:
The investor who generally purchases the B-Rated and BB/Ba bond classes along with unrated classes.
Trustee:
The trustee’s main role is to possess all the loan documentation and channel payments received from the master servicer to the bondholders. The trustee’s have great latitude in relation to the Pooling and Servicing Agreement (PSA) but often delegate duties to the master and special servicers.
Rating Agency:
The rating agencies responsibility is to rate the securitization. There could be 1 or even 4 rating agencies at any given securitization and their main objective is to rate each bond class in accordance with its respective risk factors.
WHY CHOOSE INTEGRA?
By electing to work with Integra, our clients gain access to:
- Higher Leverage
- Speed + Certainty of Execution
- Non-Recourse (with carve-outs)
- Flexible Underwriting
- Interest Only Loan Options
- Longer Term
- Low Interest Rates
- Loans available in secondary and tertiary markets
We offer a full gamut of financing options for stabilized and transitional properties nationwide. Our team of professionals will help you realize the full potential of your commercial real estate portfolio and maximize its financial performance. We are committed to every debt & equity transaction, particularly where timing, structure and certainty of execution are of the utmost importance.
CONTACT US FOR MORE INFORMATION: (212) 353-2800
