CMBS Loans: Commercial Mortgage Backed-Securities Explained
Looking into CMBS loans for your next hotel financing project? These loans provide appealing terms for large loans on high-end real estate properties. For these non-recourse, fixed-rate loans with terms of up to ten years, and up to a 30-year amortization, the LTV ratio is typically as high as 75 percent. Learn more about CMBS conduit loans in our expert guide, which explains how they work, how they differ from traditional commercial loans, and the pros and cons of CMBS loans for hotel financing.
What is a CMBS Loan?
Commercial mortgage-backed securities (CMBS) loans are also known as conduit loans. This type of loan is used to buy commercial real estate such as multifamily housing communities, hotels, warehouses, or other similar property types. They typically use the property as collateral and have flexible underwriting standards.
However, a CMBS loan is not the same as traditional commercial real estate loan options. A traditional commercial loan is repaid over time by the lender. A conduit loan, on the other hand, will be sold and packaged with other commercial mortgage loans into a trust known as a Real Estate Mortgage Investment Conduit (REMIC), converted into bonds, and sold to bond investors on the secondary mortgage market. This is known as securitization, and it is from this process that these loans get their name.
If you want to add a new hotel property to your company's portfolio but don't have a lot of collateral, a CMBS loan could be a great way to get the money you need.
How Do CMBS Loans Work?
After the borrower receives the actual funds from the conduit lender, all future dealings with the CMBS loan are handled by a commercial mortgage servicer, also known as a master servicer. All CMBS loan payments will be collected by this third-party loan servicer, who will also interact with the borrower as needed.
If the borrower fails to make the required loan payments, a special servicer will step in and work to modify the CMBS loan terms or will send the property into foreclosure and sell it if necessary.
CMBS loans for hotel financing and hotel development are a popular product because they allow lenders to offer borrowers a loan that, once sold to an investor, has no effect on their liquidity position.
CMBS Loans Explained:
Commercial Mortgage-Backed Securities Structure
Two underwriting parameters govern conduit loans: the debt service coverage ratio (DSCR) and the loan to value ratio (LTV). Both parameters are considered in the loan analysis, along with a predicted debt yield, or net operating income to loan amount ratio, of at least 5%.
LTV serves as a guide to the lender's level of risk; a higher LTV ratio indicates a riskier loan. CMBS loans typically offer investors maximum LTVs of 75%.
The DSCR is the net operating income to annual debt ratio. The lender determines the debt service coverage ratio, which varies depending on the level of risk associated with the property.
Because of their forgiving underwriting parameters, CMBS loans are a popular option for hotel funding sources, as well as commercial real estate investors in general.
Borrowers will also need to show equity of 30-40%, post-closing liquidity of 5% of the total amount to be borrowed, and total net worth equal to a minimum of 25% of the loan. Expense ratios and market vacancies are also important considerations in the underwriting and securitization process.
CMBS Loan Maturities
The maturity date of a CMBS loan, like the principal amount of a note, draft, acceptance bond, or other debt instrument, refers to the point in time when the principal of a fixed income instrument must be repaid to an investor.
CMBS Loan Assumption
CMBS loan assumption is the process of purchasing a commercial property in which a new borrower (buyer) assumes the mortgage obligations and unpaid loan balance of the original borrower's (seller) CMBS loan. A servicer may require the loan-to-value (LTV) ratio to remain the same as it was at the loan's origination in order for a new borrower to assume a CMBS loan during a property sale, even if the value of the property being purchased has changed.
Commercial Mortgage-Backed Securities Prepayment and Default
The risk associated with the premature return of principal on a fixed-income security is known as prepayment risk. When debtors return a portion of the principal early, they are not required to pay interest on that portion of the principal. As a result, investors in related fixed-income securities will not receive interest on their principal. Fixed-income securities, such as callable bonds and mortgage-backed securities, have the highest prepayment risk (MBS). Prepayment penalties are common in bonds with prepayment risk. Because commercial mortgages are generally fixed in term, CMBS loans can offer less of a prepayment risk than residential mortgage-backed securities (RMBS).
FAQ’s About Commercial Mortgage-Backed Securities (CMBS) Loans
How Are CMBS Loans Priced?
Fixed interest rates are used to price CMBS loans, which are typically based on the swap rate plus a spread, or the lender's profit. Rates have been hovering in the 4-5 percent range for many years, though in certain market conditions, they have dropped as low as 3%.
How Do You Qualify for a CMBS Loan?
Most lenders require that you have a net worth equal to at least 25% of the total loan amount in order to qualify for CMBS financing. In addition, at least 5% of the total loan amount must be available in liquid assets. A CMBS loan typically has terms of 5, 7, or 10 years with an amortization period of 25 – 30 years.
Who Can Get a CMBS loan?
Any company looking to invest in commercial real estate can and should consider CMBS loans as a funding option if they want 75 percent or less leverage and a loan request of at least $2MM.
How Long is a CMBS loan?
CMBS (Conduit) loans typically have terms of 5, 7, or 10 years (with a rare exception of 15 years) and amortizations of 25-30 years. Depending on market conditions, a portion or all of the CMBS loan terms may be interest-only.
CMBS Loans for Hotel Financing
You've come to the right place if you're looking for a CMBS loan for a hotel, motel, or resort.
Hospitality Funding has experience working with both mainstream and niche CMBS lenders and can provide hotel financing ranging from $3 million to hundreds of millions of dollars. Contact us today to speak with a hotel funding expert and get assistance in obtaining the financing you need for your hospitality property.