CMBS Lenders vs. Life Companies: What You Need to Know
CMBS lenders and life companies often compete in the same space for large real estate deals. Both have significant advantages and certain disadvantages. For instance, life company loans typically offer lower rates and significantly better loan servicing, while CMBS loans are much easier to get approved for and offer benefits including interest-only periods (and even full, interest-only loans).
How CMBS Lenders and Life Companies Compare
CMBS lenders and life companies often compete in the same space for large real estate deals. Both have significant advantages and certain disadvantages. For instance, life company loans typically offer lower rates and significantly better loan servicing, while CMBS loans are much easier to get approved for and offer benefits including interest-only periods (and even full, interest-only loans).
The Benefits and Drawbacks of CMBS Loans
CMBS loans are some of the easiest multifamily loans to apply for, especially if a borrower is looking for a large loan at a relatively affordable interest rate. Most loans are asset based, which means that a borrower may not necessarily need to have strong financials in order get approved, as long as the property can generate sufficient income (a minimum DSCR of 1.20x is typically required). In addition, CMBS lenders typically offer leverage up to 75% LTV, which is relatively generous, considering that they often offer loans to properties in secondary or tertiary markets.
However, for borrowers, CMBS loans typically do not offer a great servicing experience; since these loans are securitized and sold on the secondary market, borrowers generally cannot expect any assistance if they have trouble making their mortgage payments. In addition, servicing is often outsourced to a different firm (not the original lender), who may not have the borrower’s priorities in mind. Finally, CMBS loan rates may be volatile, and, while the vast majority of CMBS loans are fixed-rate, rates can vary significantly before closing.
The Benefits and Drawbacks of Life Company Loans
In general, life company loans can offer significantly lower rates than CMBS, and, unlike CMBS loans, offer an ideal servicing experience for borrowers. Since life companies keep these loans on their books, a borrower can interface directly with their lender to discuss any issues or concerns. Also, unlike CMBS loans, life company loan rates are often fixed during the application process, so a borrower will not have to worry about rates swinging wildly upward before their closing. Life company loans offer far longer terms than CMBS— with many life companies offering up to 25-year, fully amortizing loans.
Despite their benefits, life company loans aren’t right for every borrower. For one, life company loans have notoriously stringent lending standards; most properties must consist of Class A commercial real estate in a major MSA— and, unlike conduit lenders, life companies will typically look deep into borrower financials. In addition, life companies don’t offer nearly as much leverage as CMBS lenders, with leverage maxing out at 70%, and many companies only offering 50-55% leverage.
Who are the Top CMBS Lenders?
As of Q1 2018, the top CMBS lenders in the U.S. included:
JP Morgan Securities: $3.4 billion in loan volume, 17.7% of market share
Deutsche Bank: $2.7 billion in loan volume, 14.1% of market share
Goldman Sachs: $3.8 billion, 9.6% market share
Wells Fargo Bank: $3.1 billion, 7.6% market share
What are the differences between CMBS lenders and life companies?
CMBS lenders and life companies often compete in the same space for large real estate deals. CMBS lenders offer benefits including interest-only periods (and even full, interest-only loans), while life company loans typically offer lower rates and significantly better loan servicing. Life company loans offer far longer terms than CMBS— with many life companies offering up to 25-year, fully amortizing loans. However, life company loans have notoriously stringent lending standards; most properties must consist of Class A commercial real estate in a major MSA— and, unlike conduit lenders, life companies will typically look deep into borrower financials. In addition, life companies don’t offer nearly as much leverage as CMBS lenders, with leverage maxing out at 70%, and many companies only offering 50-55% leverage.
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What are the advantages and disadvantages of working with CMBS lenders?
The advantages of working with CMBS lenders include access to low interest rate financing, even for borrowers who may not qualify for other types of loans. Additionally, CMBS loans are typically non-recourse, meaning that the borrower is not personally liable for the loan.
The major downside of CMBS loans is the difficulty of getting out the loan early. Most, if not all CMBS loans have prepayment penalties, and while some permit yield maintenance (paying a percentage based fee to exit the loan), other CMBS loans require defeasance, which involves a borrower purchasing bonds in order to both repay their loan and provide the lender/investors with a suitable source of income to replace it. Defeasance can get expensive, especially if the lender/investors require that the borrower replace their loan with U.S. Treasury bonds, instead of less expensive agency bonds, like those from Fannie Mae or Freddie Mac. In addition, CMBS loans typically do not permit secondary/supplemental financing, as this is seen to increase the risk for CMBS investors. Finally, it should be noted that most CMBS loans require borrowers to have reserves, including replacement reserves, and money set aside for insurance, taxes, and other essential purposes.
What are the advantages and disadvantages of working with life companies?
Life company loans typically offer lower rates and significantly better loan servicing than CMBS loans. Life companies also offer far longer terms than CMBS— with many life companies offering up to 25-year, fully amortizing loans. However, life company loans have notoriously stringent lending standards; most properties must consist of Class A commercial real estate in a major MSA— and, unlike conduit lenders, life companies will typically look deep into borrower financials. In addition, life companies don’t offer nearly as much leverage as CMBS lenders, with leverage maxing out at 70%, and many companies only offering 50-55% leverage.
Sources: CMBS Lenders vs. Life Companies: What You Need to Know and CMBS Loans, Life Company Loans
What types of commercial real estate loans are available through CMBS lenders?
CMBS loans are available for a variety of property types, including multifamily properties, apartment buildings, office buildings, hotels, retail, industrial, and self-storage properties. These loans are also available to more ‘exotic’ or unconventional property types, such as marinas, parking garages, or healthcare facilities.
What types of commercial real estate loans are available through life companies?
Life companies offer an interesting alternative to Fannie Mae and Freddie Mac financing, often having longer loan term options and exceptionally competitive rates. Life company financing is less competitive when it comes to leverage, however, particularly when it comes to cash-out refinancing. Even so, when it comes to larger balance ($10 million and up) commercial real estate loans for properties including office buildings, retail centers, single-tenant retail (Walgreens, Target, Walmart, CVS, etc), and other commercial properties, life companies are often the most competitive financing option. That said, life companies are very selective when it comes to financing, generally focusing on the highest class/quality assets.
What factors should I consider when deciding between CMBS lenders and life companies?
When deciding between CMBS lenders and life companies, you should consider the following factors:
- CMBS lenders typically offer easier approval and benefits such as interest-only periods and full, interest-only loans.
- Life company loans offer significantly lower rates than CMBS and an ideal servicing experience for borrowers.
- Life company loans offer far longer terms than CMBS— with many life companies offering up to 25-year, fully amortizing loans.
- Life company loans have notoriously stringent lending standards; most properties must consist of Class A commercial real estate in a major MSA.
- Life companies don’t offer nearly as much leverage as CMBS lenders, with leverage maxing out at 70%, and many companies only offering 50-55% leverage.
For more information, please see CMBS Lenders vs. Life Companies: What You Need to Know.
Who are the Top Life Company Lenders?
In comparison to CMBS lenders, it’s significantly more difficult to find information about life company lenders, as they are much less likely to publish lending statistics than CMBS lenders, who eventually sell CMBS on the open market. However, in 2015, life insurance companies issued $59.1 billion in commercial and multifamily real estate loans. Currently, some of the biggest lenders in the space are Northwestern Mutual, Pacific Life, New York Life, Manhattan Life, MetLife, Prudential, Mass Mutual, and TIAA-CREF.