Multifamily CMBS Loans
CMBS loans provide non-recourse financing for apartments, multifamily, and commercial properties starting at $2 million, with LTVs up to 75%. After closing, they are packaged and sold on the secondary market by banks, lenders, and other institutions.
- How Does a CMBS Loan Work?
- Sample CMBS Terms for Apartment and Commercial Property Loans in 2024
- Advantages
- Disadvantages
- Featured CMBS Loan Options
- CMBS Requirements for Multifamily Financing
- Prepayment Penalties for Conduit Loans
- Loan Servicing for CMBS Borrowers
- Mezzanine Debt and Preferred Equity
- Learn More
- Related Questions
- Get Financing
How Does a CMBS Loan Work?
CMBS stands for commercial mortgage backed securities, and this refers to commercial mortgage loans that are pooled into securities and sold on the secondary market to investors. CMBS loans, also known as conduit loans, are non-recourse and offer low interest rates and relatively high leverage, with LTVs typically going up to 75% for eligible properties. CMBS financing is often ideal for projects that are not a good fit for agency lenders like Fannie Mae or Freddie Mac.
Since CMBS underwriting is more asset focused, lenders are more flexible for borrowers with credit or legal issues, such as a recent bankruptcy. These loans are also great for when a situation requires a faster closing process with less red tape and more focus on the property income than the borrower or the curb appeal of the multifamily project.
Sample CMBS Terms for Apartment and Commercial Property Loans in 2024
Size | $2 million and up |
Term | 5-year fixed, 7-year fixed, 10-year fixed |
Interest | Starting at 200bps over relative swap rate |
Amortization | 25 to 30 years |
Maximum LTV | 75% |
Minimum DSCR | 1.25 |
Minimum Debt Yield | 8.7% |
Recourse | Non-recourse with standard “bad boy” carve-outs |
Reserves | Taxes, insurance, replacement reserve and leasing costs |
Prepayment | Defeasance or yield maintenance |
Property Types | Multifamily, office, retail, industrial, self storage, manufactured housing, hotels, student housing |
Advantages
Non-recourse.
Attractive fixed rates for long term loans.
Can go up to 75% LTV.
Wide range of loan sizes.
Will consider non-Class “A” assets.
Less scrutiny for borrowers.
Provides cash out refinancing.
Loans are fully assumable.
Can be combined with mezzanine debt or preferred equity in many scenarios.
Less autonomy in the operation of the property and limited flexibility to deviate from the terms of the loan documents.
Difficulty in releasing collateral.
Expensive to exit.
Lock outs often prevent prepayment or up to two years.
Reserves required.
Secondary financing (i.e. mezzanine debt or preferred equity) not always allowed.
What are the pros of CMBS loans?
- CMBS loans have several incredible upsides. First, these loans are available to a wide range of borrowers, including those that might be excluded from traditional lenders due to poor credit or strict collateral/net worth requirements. CMBS loans are also non-recourse, which means that even if a borrower defaults on their loan, the lender can’t go after their personal property in order to repay the debt. CMBS loans also offer relatively high leverage of up to 75%.
What are the cons of CMBS loans?
- The major downside of CMBS loans is the difficulty of getting out of a loan early. Most CMBS loans have significant 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 to repay the loan and provide the lender with a suitable source of income to replace it.
Disadvantages
Featured CMBS Loan Options
CMBS Requirements for Multifamily Financing
In general, lenders look at two major metrics when deciding whether to approve a CMBS loan; DSCR and LTV. However, they also look at debt yield, a metric which is determined by taking the net operating income of a property and dividing it by the total loan amount. This helps determine how long it would take a lender to recoup their losses if they had to foreclose on the property. And, while it’s true that CMBS loans are mostly income based, lenders still typically require a borrower to have a net worth of at least 25% of the entire loan amount, and a liquidity of at least 5% of the loan amount.
Prepayment Penalties for Conduit Loans
Conduit loans typically require one of two types of prepayment penalties; defeasance or yield maintenance. Defeasance is the process of actually replacing the loan’s collateral with equivalent securities, in most cases, treasury bonds. While it depends on prevailing interest rates and exact terms of a borrower’s loan agreement, defeasance can often be quite expensive for borrowers.
The other prepayment option is yield maintenance, which reimburses investors for the interest they lose as a result of a borrower paying off a loan early. Usually this involves paying the both the remaining collateral of the loan, and paying the gap between with interest rate and the current U.S. Treasury rate. If interest rates are falling, yield maintenance is more expensive for borrowers, while if interest rates are climbing, it’s significantly less expensive. However, yield maintenance formulas can be somewhat complex, and typically include a floor of 1%, meaning that even if the interest rate is now the same (or even less) than the U.S. Treasury rate, borrowers will have to pay a small fee.
Loan Servicing for CMBS Borrowers
As a final note, potential CMBS borrowers should understand that, unlike bank loans, you will not be dealing directly with your lender after your loan has been securitized and sold to investors. Instead, you will work with a master servicer, a company which specifically works to administer conduit loans. In addition to collecting payments, a master servicer (or a company they have contracted) is responsible for inspecting the property and taking care of other administrative functions.
If you default on your loan, it will typically be sent to a special servicer, who may be able to adjust the terms of your debt. This could include deferring or forgiving interest or fees, or allowing the substitution of collateral. However, the special servicer works for the investors, not the borrower, so if they believe that foreclosing on the property will increase investor profits, they will almost certainly do so. In other cases, they may assist with the loan assumption process, in which another borrower would take on the CMBS debt. In general, banks and life companies are significantly more flexible when it comes to modifying loan terms when compared to CMBS.
Mezzanine Debt and Preferred Equity
While CMBS typically offers leverage up to 75% for qualified borrowers, some investors may wish to increase their leverage even further by adding a mezzanine loan or preferred equity to their capital stack, which can greatly increase their IRR. Some conduit lenders allow this, while others do not. While the CMBS lender will still be the first to be repaid should the borrower default, mezzanine debt can add to a borrower’s monthly debt service and could make it harder for them to repay their primary loan. Either way, the addition of a second-position loan on top of CMBS senior debt often requires creative structuring, additional legal fees, and the use of an intercreditor agreement between the two lenders.