CMBS loan Basics
Like a commercial real estate loan, CMBS loan are used to acquire commercial property. However, because of the manner in which they are used these loan differ in several important ways. Continue reading to learn more about what a Commercial mortgage backed security is. Also find out how they may be different from conventional loans.
What is a CMBS Loan (Conduit)
In most cases when a loan is approved the individual pays it back to the lender over the course of time with interest. CMBS loans are handled differently. These loans are typically packaged with other loans into a trust and sold on a secondary market. This trust is commonly known as a Real Estate Mortgage Investment Conduit (REMC). The process of selling them on the secondary market is called securitization. Because they are sold to investors first, the interaction between the lender and lender is different than with many common loans. In most cases the loan has a ten year term but is handled as if the loan is for 20 or 30 years instead. This means the monthly payment may be smaller as if for the longer term. The very last payment is expected to cover the total of the remainder.
Aspects to be Aware Of
While these loans may have less flexible terms than a traditional loan, they often have lower interest rates. Another great factor is that they are often non-recourse and fully assumable. This means one specific individual isn’t liable for the full repayment. So if the property is sold then the buyer can take over the loan. Also, if the borrower defaults on the loan, they won’t need to go through the bankruptcy process. The Entity that secured the loan didn’t personally guarantee the debt.
Defeasance & Yield maintenance
Prepayment is also an important aspect that differs in this type of loan. Rather than being calculated as a percentage of lost interest. The form of prepayment that a CMBS loan is arranged either through yield maintenance or defeasance. Yield maintenance is a type of fee the lender can charge in the event of the loan being repaid early or a refinance. This allows the lender to continue to collect the amount of money they otherwise would have earned as interest. With defeasance the loan can remain outstanding while the property remains lien free.
Now that you know the basics behind CMBS loans, you can begin to determine if this is the right type of loan for your investment opportunity. Consider the ways a CMBS loan is different from a traditional loan when making your decision. Remember, if you still have questions it’s best to consult with a professional. To learn more about what a Commercial Mortgage Backed Security is, please click here.
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