CMBS B-Pieces: What Borrowers Should Know

CMBS loans are among the most popular types of financing for multifamily and commercial real estate, with approximately $77 billion in CMBS financing issued in 2018 alone. While these loans are popular, the underlying financial structure of the debt can be complicated. As many already know, CMBS loans are designed for securitization, meaning that one borrower’s loan will generally be grouped with many others to generate a commercial mortgage-backed security, which is then sold to investors on the secondary market. However, not all of these securities are the same; instead, they are divided between multiple classes or tranches; the most significant difference being between A-class bondholders and B-piece bondholders. B-piece bondholders receive higher compensation but need to wait until all A-class bondholders are fully paid before they see any income.

Furthermore, both A-class and B-piece CMBS are divided into multiple tranches themselves. A-class bonds generally include tranches AAA/Aaa through BBB-/Baa3 (considered investment-grade debt), while B-piece tranches typically range from BBB+/Ba1 through B-/B3 (considered sub-investment grade debt).

Does This Impact CMBS Borrowers?

The information above might not seem applicable to the average commercial investor looking to take out a loan on an apartment building or office plaza, but it’s a lot more relevant than one might think. Interestingly enough, a sizable portion of CMBS that are sold to investors are B-piece bonds. For that reason, B-piece bonds have a serious impact on the price, availability, and even the terms of CMBS debt. As another point of interest, the Dodd-Frank Act, which was designed to bring stability to American financial markets, mandates that B-piece CMBS investors keep their bonds for at least five years. That way, traders and hedge funds can’t merely purchase these riskier securities to trade them later. The Act also stipulates that conduit lenders need to keep 5% of their loans on their books. These rules, combined, mean that CMBS lenders have needed to uphold stricter underwriting standards than they did in past years (i.e., in the run-up to the 2008 financial crisis).