If you’re exploring funding options for your commercial real estate project, you’ve probably heard of CMBS financing. These loans can be termed as Commercial Mortgage-Backed Securities loans as well and they are an exclusive source of capital. They are not suitable for all borrowers, though they may suit some of them very well.
Throughout this guide, we will unravel the nature of CMBS loans, how they work and the advantages and disadvantages that every borrower must be aware of before putting his or her signature on the dotted line.
What Is CMBS Financing?
CMBS financing refers to commercial loans that are pooled together and sold to investors as securities. Your loan is not kept on the books of a single lender but rather, a bigger pool develops. These loans are packed and sold out in the secondary market.
Since the loan is being sold by the lender, you will not deal with the original lender rather it will be a loan servicer. With this structure, CMBS loans vary from bank lending or privately financed loans.
These loans are typically used for income-generating properties like:
- Office buildings
- Shopping centers
- Hotels
- Multifamily properties
Pros of CMBS Financing
So, let’s dive into the advantages of CMBS loans and why some real estate investors prefer them.
1. Competitive Interest Rates
Firstly, one of the biggest benefits of CMBS financing is the attractive interest rate. Because these loans are sold to investors, they often come with lower rates compared to traditional loans. That can save you thousands over the life of your loan.
2. Non-Recourse Structure
Secondly, CMBS loans are usually non-recourse. This means if the borrower defaults, the lender can’t go after personal assets; only the property. For investors, this is a big win. It limits personal liability and offers peace of mind.
3. Longer Terms
Thirdly, a large number of the CMBS loans provide longer-term loans of 5 to 10 years with amortization schedules of 25 to nearly 30 years. This is less volatile and assists in planning long-term investments.
4. High Leverage
Moreover, CMBS financing also allows for higher loan-to-value (LTV) ratios, sometimes up to 75%. This means you can finance more of the property’s value, preserving your cash for other investments.
5. Widely Available
Lastly, these loans are available across many property types and markets. From office parks to retail centers, CMBS financing is broadly accessible, making it a popular option for commercial investors.
Cons of CMBS Financing
While CMBS loans offer many benefits, they’re not perfect. So, here are a few disadvantages every borrower should consider.
1. Complex Servicing
To begin with, once your loan is securitized, it is handled by a third-party servicer, not the original lender. This can lead to poor communication and slower response times, especially if you need to restructure the loan or handle a late payment.
2. Limited Flexibility
Next, CMBS loans are less flexible than traditional loans. Modifications, prepayments, or early exits are difficult. In fact, prepaying a CMBS loan often comes with hefty prepayment penalties, such as yield maintenance or defeasance.
3. Strict Underwriting
Furthermore, the CMBS loans are available, but they may be highly demanding and time-consuming during the underwriting process. The property cash flow, occupancy of the property, and the quality of the tenants are considered by the lenders. Otherwise, your application may be turned down, when you fail to meet their standards.
4. Balloon Payments
Besides, many CMBS loans come with a balloon payment at the end. This means you must pay off the remaining balance in one lump sum or refinance it. If you’re not ready, this could put your property at risk.
5. Limited Workout Options
Additionally, if your property hits a rough patch, don’t expect much help from your loan servicer. CMBS loan servicers are notoriously rigid. They often lack the authority to negotiate new terms, leaving borrowers with fewer options during tough times.
CMBS Financing vs. Private Lending
Now, you might wonder: Is CMBS financing better than private lending? That depends on your goals.
Private lenders, like Loan Locker, offer far more flexibility. Because they use discretionary capital and control the entire lending process, approvals are faster, and terms can be tailored to your project.
Loan Locker, for instance, funds a wide range of deals:
- Fix and flip properties
- Mobile home park loans
- RV parks
- Multifamily real estate financing
- Raw land projects
If your project doesn’t fit the strict criteria of CMBS loans, or if you value speed and flexibility, private lending may be a better choice.
When CMBS Financing Makes Sense
So, when should you consider CMBS financing? So, here are a few ideal scenarios:
- You’re investing in a stabilized, income-producing property.
- You want a non-recourse loan to protect your personal assets.
- And, you prefer long-term financing with lower monthly payments.
- You don’t plan to refinance or sell the property early.
If these align with your strategy, a CMBS loan could work well for you.
When to Explore Other Options Other Than CMBS Financing
On the other hand, CMBS financing may not be ideal if:
- You’re investing in a value-add or transitional property.
- You want the ability to refinance early or sell in a few years.
- Plus, you prefer direct communication with your lender.
- You may need loan flexibility during economic uncertainty.
In these cases, working with a direct private lender like Loan Locker might give you a better experience.
Final Thoughts on CMBS Financing
CMBS financing offers great rates, non-recourse terms, and longer repayment periods. However, it is also accompanied with complexity, balloon payment and stiff serving. It is a sound option to those with solid and stable assets and needing a long-time coverage.
But in case you need speed, flexibility and a lending partner who knows your vision, then you may want to consider a better way forward which might be via the direction of a private lending company.
Get Fast, Flexible Funding with Loan Locker
At Loan Locker, we help real estate investors secure capital without the red tape. Investing in properties, whether it be flipping houses, development of mobile home parks or buying up multifamily properties, we are your ally.
Our process is quick, our terms are flexible, and our team actually understands real estate.
So, ready to explore your funding options? Visit LoanLocker.com today and let’s talk about your next project.