CMBS Loans Explained – Winston Rowe & Associates
Commercial mortgage-backed security (CMBS) is a fixed-income security, typically in the form of a bond, which uses commercial real estate loans as collateral.
By: Winston Rowe & Associates
CMBS stands for commercial mortgage-backed securities. A CMBS loan is a commercial real estate loan that is backed by a first-position commercial mortgage.
CMBS loans are for properties such as apartments, hotels, warehouses, offices, retail, or any other type of real estate that is used in connection with a company or business in need of such a space.
There are two types of CMBS loans — the traditional version or the delegated program.
The traditional version works much like a conventional loan.
Terms are agreed upon by both the investor and the lender, and then the lender appoints a trust vehicle for the loan. The loan is then separated into bonds — also known as tranches — that are created based on a risk assessment of the value of the loan.
The delegated program is a CMBS loan where there is one buyer for the CMBS loan and terms are agreed upon before the actual loan application is filled out.
The terms generally come from the financial institution where the CMBS loan originated from.
For CMBS Loans, Conduit Lenders have reverted back to more prudent real estate credit decisions, with a much more conservative attitude towards risk.
In addition to more traditional loan to value (LTV) maximums of 75%, and debt service coverage ratios (DSCRs) of at least 1.25x, Lenders are also calculating the anticipated debt yield (net operating income/loan amount) of at least 7-8%. Borrowers should expect to have "hard cash" equity invested in their projects, while being able to maintain a post-closing liquidity of at least 5% of the loan amount and an overall net worth of at least 25% of the loan amount.
Winston Rowe & Associates prepared this knowledge based article.
They are a commercial real estate advisory and due diligence firm that specializes in structuring the financing for commercial real estate transactions.
They can be contacted at 248-246-2243 or visit them online at http://www.winstonrowe.com