There has been approximately $75B of CMBS issued this year, and the forecast is close to $100B by year end. While this is far from the peak of $230B in 2007, this will be the largest CMBS issuance since the market completely went away in 2008 and 2009. See issuances by year below:
While Fannie and Freddie are able to provide non-recourse debt for multifamily properties, there are limited options are available for other property types (retail, office, hotel, industrial, self-storage, and MHC) especially for smaller loans in secondary/tertiary markets.
The volatility in the market the past month gave investors a reminder that interest rates on CMBS deals are not locked in until a deal is closed. While pricing has increased, interest rates are still at historical lows and underwriting has loosened since the financial crisis.
Let’s go through some of the advantages and disadvantages of this loan product.
Advantages:
- Non-recourse – Sponsor will only have to sign bad boy carve outs and not be held personally liable for any shortfalls
- Up to 75% LTV- Sized based on appraisal and debt yield
- 30 year amortization- typically only 20-25 years from banks
- Interest only available for 1-2 years
- Unlimited Cash out refinances- no limit on cash outs, rewards borrowers who have significantly improved property and wants to hold long term
- Fixed interest rates over long term (5 year or 10 year)- lock in historically lower rates
- Minimum typically $3M-$5M with no maximum- Lenders can take on smaller loans than they typically wouldn’t do since the CMBS game is about volume as they will be securitizing the loan to earn a profit.
- Secondary/Tertiary markets- 1.5-2 hours from nearest airport- Most banks won’t drive out to secondary or tertiary markets for balance sheet loans, but are more flexible on location for CMBS.
Disadvantages:
- Loan Structure: Set loan documents, limited negotiation as they want loans to be conforming. CMBS loan documents are not flexible- they must fit in box. If unusual loan provisions, loan might be kicked out from a securitization.
- Prepayment: Lockout for 24 months after securitization then prepayment penalties (defeasance or yield maintenance) except for last 3 months open to prepayment. Loan can be assumed.
- Defeasance penalties- Defeasance means substitution of collateral. Investor must pledge new collateral in favor of the lender in return for a release of the mortgage encumbering the property. The substitute collateral is typically government securities in an amount that generates cash flow sufficient to pay all remaining principal and interest through maturity. Typically very expensive to get out of CMBS loans early.
- Volatility in pricing: Volatile market where spreads to treasury could cause pricing to change from loan application to loan closing. Might receive a quote of 250 bps over 10 yr treasury, but 60 days later it increase to 275 bps due to an international event. Spreads increased significantly in 2008.
- Loan Servicing: 40 different CMBS loan originators so servicer might not be the bank you originally signed the deal with. These servicers have to follow the loan agreement exactly so you won’t have flexibility on making changes to the deal once it is closed.
We work with multiple CMBS lenders and can size up your next acquisition or refinance. Please reach out to me to learn more about CMBS: jeng@oldcapitallending.com or 214-300-5035.
While Fannie and Freddie are able to provide non-recourse debt for multifamily properties, there are limited options are available for other property types (retail, office, hotel, industrial, self-storage, and MHC) especially for smaller loans in secondary/tertiary markets.
The volatility in the market the past month gave investors a reminder that interest rates on CMBS deals are not locked in until a deal is closed. While pricing has increased, interest rates are still at historical lows and underwriting has loosened since the financial crisis.
Let’s go through some of the advantages and disadvantages of this loan product.
Advantages:
- Non-recourse – Sponsor will only have to sign bad boy carve outs and not be held personally liable for any shortfalls
- Up to 75% LTV- Sized based on appraisal and debt yield
- 30 year amortization- typically only 20-25 years from banks
- Interest only available for 1-2 years
- Unlimited Cash out refinances- no limit on cash outs, rewards borrowers who have significantly improved property and wants to hold long term
- Fixed interest rates over long term (5 year or 10 year)- lock in historically lower rates
- Minimum typically $3M-$5M with no maximum- Lenders can take on smaller loans than they typically wouldn’t do since the CMBS game is about volume as they will be securitizing the loan to earn a profit.
- Secondary/Tertiary markets- 1.5-2 hours from nearest airport- Most banks won’t drive out to secondary or tertiary markets for balance sheet loans, but are more flexible on location for CMBS.
Disadvantages:
- Loan Structure: Set loan documents, limited negotiation as they want loans to be conforming. CMBS loan documents are not flexible- they must fit in box. If unusual loan provisions, loan might be kicked out from a securitization.
- Prepayment: Lockout for 24 months after securitization then prepayment penalties (defeasance or yield maintenance) except for last 3 months open to prepayment. Loan can be assumed.
- Defeasance penalties- Defeasance means substitution of collateral. Investor must pledge new collateral in favor of the lender in return for a release of the mortgage encumbering the property. The substitute collateral is typically government securities in an amount that generates cash flow sufficient to pay all remaining principal and interest through maturity. Typically very expensive to get out of CMBS loans early.
- Volatility in pricing: Volatile market where spreads to treasury could cause pricing to change from loan application to loan closing. Might receive a quote of 250 bps over 10 yr treasury, but 60 days later it increase to 275 bps due to an international event. Spreads increased significantly in 2008.
- Loan Servicing: 40 different CMBS loan originators so servicer might not be the bank you originally signed the deal with. These servicers have to follow the loan agreement exactly so you won’t have flexibility on making changes to the deal once it is closed.
We work with multiple CMBS lenders and can size up your next acquisition or refinance. Please reach out to me to learn more about CMBS: jeng@oldcapitallending.com or 214-300-5035.
