What is a “CMBS” loan?
“CMBS” loans are pooled together with many others as structural support for a Commercial Mortgage Backed Security bond issuance. With broad diversification of risk in the portfolio – by geography, property type, tenant risk and borrower- investors in the bonds will accept a lower weighted average interest rate than any single loan by itself would command. This lower cost of funding is passed through to the borrower.
How are CMBS loans different from other types of loans?
CMBS loans are unique in that they offer an owner 10-year, fixed rate, non-recourse financing. It allows an owner to have predictability as to his/her debt service obligations over an extended period of time, and with a structure that, within guidelines, limits the lender’s recourse to the collateral property.
What are the differences between a CMBS loan and an Agency loan?
- Agency loans are only applicable to Multifamily and Mobile Home Community properties whereas CMBS loans can be collateralized by Office, Retail, Industrial, Self-Storage and Hospitality properties as well.
- An Agency loan will have a lender’s loan fee. A CMBS loan has no lender loan fee as the lender earns its compensation when the loan is sold into securitization.
- CMBS loans are priced as a credit margin over the higher of US Treasury rates or the Treasury Swap Rate, whereas Agency loans are priced solely over the Treasury rate.
- Agency loans may have loan terms from 5 to 30 years; CMBS loans are always 10 years.
- The rate on an Agency loan can typically be locked during the underwriting process whereas the rate on a CMBS loan is usually locked at closing.
- A step-down Prepayment Penalty structure can be negotiated on an Agency loan while standard Prepayment protection is Yield Maintenance. With a CMBS loan, Prepayment protection is always either Yield Maintenance or Defeasance.
- There is more flexibility in negotiating reserves with an Agency loan.
How does a Permanent loan from a bank differ from CMBS or Agency loans?
- Banks typically will limit the length of time they offer a fixed interest rate to five years, in some cases seven, but rarely 10 years. CMBS and Agency loans offer fixed rates for longer periods of time.
- Banks will typically not write a non-recourse loan if the Loan-to-Value ratio exceeds 50-55%. CMBS and Agency loans are non-recourse by definition, up to 75% and in some cases 80% Loan-to-Value.
- CMBS and Agency lenders are more “forgiving” on past credit issues such has foreclosures, late pays or bankruptcies.
- Banks will negotiate more flexible Prepayment terms.
- Banks may take owner-occupied, special purpose properties as collateral, whereas CMBS and Agency loans are restricted to Office, Retail, Industrial, Self-Storage, Hospitality, Multifamily and Mobile Home Community properties.
How do I know if a CMBS structure is appropriate for a particular property?
A large segment of the universe of property types are appropriate for CMBS loans- Multifamily, Office, Retail, Industrial, Mobile-Home Communities, Self-Storage facilities and Hospitality. Properties should be Class A or Class B in quality and located in Primary or Secondary markets. They should have stabilized occupancy with a fairly even lease maturity profile.
What types of properties don’t fit?
CMBS loans do not accommodate owner-occupied properties and special use properties such as manufacturing plants, recreational properties, assisted living facilities, churches, gas stations/convenience stores, etc. Loans with a low level of diversified tenancies, say less than five tenants, can be financed but at lower leverage points. The exception to this is investment grade, single-tenant properties such as a Walgreens.
Agency loans are only appropriate for Multifamily and Mobile Home Community properties.
Banks have the most flexibility in considering outside-of-the-box property types.
How are loans priced?
Fixed rates for CMBS and Agency loans are quoted as a credit margin (the “spread”) plus an Index of a like term as the loan term. The Index for a 10-year loan is either the like-term U.S. Treasury rate or, for CMBS, the 10-year U.S. Treasury swap rate. Rates are locked shortly before, or at, closing although at times of market stability Forward Rate Locks are available earlier in the Application period. Banks also price using a spread over an Index but they utilize a variety of Indices which take into account their costs of funding.
Are there reserves?
Yes, in most cases for CMBS loans. In return for a loan being non-recourse to the Sponsor, reserves are part of the structure of insulating the property and loan from the possibility of need for ongoing Sponsor financial support. Funds collected monthly and deposited into a reserve are subsequently made available to the Borrower to cover the costs for which the reserve was established. For example, reserves are typically held for real estate taxes, insurance and periodic capital expenditures; for commercial properties, reserves are set aside for tenant improvements and leasing commissions. When an expense is incurred, the servicer either pays the bill directly or reimburses the borrower. On less than maximum leverage loans, some reserves may be waived or caps negotiated as to how much is collected.
Agency loans will typically reserve for real estate taxes, insurance and in some cases capital expenditures.
Banks usually do not establish reserves.
Can I put subordinate financing behind a new loan?
The ability to put mezzanine financing behind a CMBS or Agency loan at some point in the future can usually be negotiated into the loan documentation. Subordinate deeds of trust are prohibited.
Banks will usually not allow subordinate financing.
Is the loan assumable?
Most loan types accommodate loan assumptions upon approval of the new borrower by the lender, and upon payment of an assumption fee.
Can a loan be prepaid?
CMBS loans have prepayment protection of either Yield Maintenance or Defeasance. Yield Maintenance is a calculation of the net present value of the difference between the Note rate and the Treasury rate as of the date of prepayment, until the Maturity date. If Treasury rates increase to higher than the Note rate, there is little expense to prepay as the lender can reinvest the funds at the higher market rates. Yield Maintenance costs become progressively more expensive if Treasury rates as of the date of prepayment are lower than the Note rate.
Defeasance is a process whereby a portfolio of alternative collateral- usually U.S. Treasuries- is substituted for the first mortgage lien on the property so as to create the same amount of cash flow that the collateral property provided. The loan stays in existence but the property is no longer tied to the loan as collateral. Prepayment penalties are waived during the last 90 to 180 days of the loan term.
Agency loans utilize Yield Maintenance for Prepayment protection, however step-down structures can be negotiated.
Banks usually utilize step-down structures, occasionally Yield Maintenance.
Who services the loan?
Primary servicing on CMBS and Agency loans is provided by one of several national firms that specialize in loan servicing. Banks service their own loan portfolios.
What costs are involved?
Costs are similar between CMBS and Agency loans-there is usually an Underwriting fee and the Borrower pays for Appraisal, Property Condition Report, Environmental Assessment, Survey, Credit, Title Insurance and Escrow. Legal costs are higher on CMBS loans than on other types of permanent loans. Banks often don’t require a Property Condition Report or Survey and may accept a lower cost form of Environmental study.
How long does it take to go through the closing process?
Typically it takes 40-50 days from Application to close, although we can close a loan as quickly as a client requires. The primary drivers are how quickly due diligence information is received from the Owner and how quickly the appraiser can complete his or her work.
What Loan-to-Value ratio can I expect to see?
Banks will typically loan up to 75-80% of When Complete appraised value.
How much equity will I have to put in?
Most banks will limit their loan to 65-70% of total costs. Shoreline has recently arranged financing at 75% of cost.
Does the current market value of the land count towards my equity?
It depends on how long a Borrower has owned the land; if it has been owned less than, say, two years, a lender will usually use the acquisition cost in calculating total costs and the Borrower’s cash equity. If a Borrower has owned a property for a longer period of time, especially in a rising market, Banks will be more willing to consider the land’s current market value.
Banks will also look at what entitlement work has been done. If a parcel was acquired without entitlements and the Borrower has taken it through the permitting or mapping process, the land clearly has more value than the price paid for it.
Is a personal guarantee required?
How long of a loan term is available?
For commercial properties, most lenders will provide an Interest Only period that matches the anticipated construction and lease-up period, then roll into a scheduled Principal & Interest period going out to loan maturity in another three to five years. For speculative residential construction loans, the standard maturity is two to three years.
Can I act as an Owner/Contractor?
Yes, with the appropriate background in successfully building a project similar in size and scope to that being considered.
Does my contractor have to be bonded?
Bonding requirements vary from Bank to Bank. It depends on the size of the job, the contractor’s experience and financial strength, and the financial strength of the guarantor.