CMBS Loans for Apartments and Commercial Properties

If you’re looking for affordable, fixed-rate, non-recourse financing for your multifamily or commercial property, a CMBS loan could be the perfect fit. CMBS loans are ideal for borrowers who may not have the net worth or liquidity required to qualify get Freddie Mac, Fannie Mae, or HUD multifamily loans. CMBS loans are available for nearly all income-producing property types, including multifamily, industrial, student housing, senior living, hotels, offices, and retail properties.

Like Fannie Mae and Freddie Mac loans, multifamily loans are pooled together and repackaged as bonds called commercial mortgage-backed securities, which are resold on the secondary market to investors. CMBS loans are often also referred to as conduit loans, as the loan is a “conduit” for a secondary-market investor looking to invest in a fixed or floating-rate bond. 

Prospective CMBS Commercial Loan Terms for 2021

• Size: $2 million+ ($1 million+ in highly unique situations) 

• Term: 5, 7, and 10 year-fixed year terms (variable-rate CMBS loans are reare, but exist) 

• Property Types: Multifamily, office, retail, industrial, senior living, student housing, hospitality, mixed-use, mobile home park, parking lot, industrial, self-storage (other property types allowed on a case-by-case basis).  

• Recourse: Non-recourse with “bad boy” carve-outs for situations such as fraud or intentional bankruptcy. 

• Prepayment: Defeasance or yield maintenance is generally required. 

• Leverage/DSCR: Generally 75-80% Max. LTV/1.20x Min. DSCR 

  • Multifamily: 80% LTV/1.20-1.35x DSCR

  • Office: 80% LTV/1.20-1.35x DSCR

  • Senior Living: 65-75% LTV/1.30-1.45x DSCR 

  • Retail: 75% LTV/1.25-1.35x DSCR

  • Mobile Home Park: 75% LTV/1.25-1.35x DSCR

  • Student Housing: 75% LTV/1.25-1.35x DSCR

  • Hospitality: 70% LTV/1.30-1.40x DSCR 

  • Parking Lots: 65-75% LTV/1.30-1.45x DSCR

  • Marinas: 65-75% LTV/1.30-1.45x DSCR

• Amortization: 25- 30 years

• Debt Yield:

  • Minimum 8.7%.

  • For reference, Debt yield is calculated by taking a property’s annual net operating income as a percentage of the entire amount of debt left on the property. Some CMBS lenders require a debt yield of at least 10%, but many allow debt yields as low as 8.7% for well-qualified borrowers. 

  • The formula for Debt Yield is: Debt Yield = Annual NOI / Total Debt

• Net Worth Requirement: Generally a minimum of 25% of the loan amount, with 5% liquidity 

• Required Reserves: 

  • Replacement reserves for property maintenance and unexpected expenses

  • Applicable taxes

  • Property and liability insurance

  • Leasing costs/commissions

Pros and Cons of CMBS Loans

Pros: 

• Low net worth requirements

• Acceptable for borrowers with credit and legal issues 

• Flexible loan sizing 

• Cash-out refinancing available 

• Loans are assumable with servicer permission 

• Non-recourse with bad-boy carve-outs 

• Fixed-rate loans up to 10 years 

• High leverage; up to 80% LTV 

• Loans sometimes allow subordinate financing 

• Issued for a wide variety of properties, including industrial, hospitality, retail, mixed-use

• Available for unique property types such as marinas and parking lots

Cons:

• High prepayment penalties

• Strict loan terms

• Requires replacement reserves for taxes, insurance, deferred maintenance 

• Loans can become recourse; bad-boy carve-out agreements are often laden with hidden ways a loan can go into “technical default” and become full-recourse 

• Can be difficult to achieve secondary financing (such as preferred equity or mezzanine loans) 

• Lockouts sometimes prohibit prepayment for 12-24 months

Who Are The Top CMBS Lenders? 

According to the Mortgage Bankers Association (MBA), the top CMBS lenders of 2020 included JP Morgan Chase & Company, Eastdil Secured, Deutsche Bank Securities, Inc., Citigroup Global Markets, and Morgan Stanley. For reference, in 2018, the last year in which lending volumes were published, the top 8 conduit lenders were: 

• JP Morgan Chase Bank: $5.71 billion, with a 14.42% market share

• Deutsche Bank: $5.54 billion, with a 13.8% market share 

• Goldman Sachs: $3.85 billion, with a 9.59% market share

• Wells Fargo Bank: $3.06 billion, with a 7.62% market share

• Citigroup: $3.08 billion, with a 7.57% market share

• Morgan Stanley: $2.72 billion, with a 6.78% market share

• Natixis: $2.32 billion, with a 5.78% market share

• Barclay’s Bank: $2.30 billion, with a 5.75% market share

What Else Should I Know About CMBS?

CMBS Loan Servicing

Borrowers should keep in mind that CMBS loans are not serviced by the original lender and are instead serviced by a separate servicing company. These servicers are known to be quite inflexible regarding borrower behavior.

If a borrower defaults on their loan, the loan will be sent to a new servicer, called a special servicer. CMBS defaults can occur for seemingly trivial reasons, such as being late on a property insurance payment or failing to submit a P&L report to the servicer on time.

Once a loan is sent to a special servicer, they will generally begin proceedings to foreclose on the property. While a loan workout can sometimes be arranged, special servicers are notorious for attempting quick foreclosures, sometimes with the hope of hanging onto the property themselves as an investment. 

Prepayment Penalties

CMBS prepayment is generally limited to either defeasance or yield maintenance. Defeasance involves the purchase of assets (usually U.S. government bonds) to replace the income the lender will lose from the borrower prepaying the loan.

Defeasance usually requires the use of an outside consultant and can be quite expensive. However, if bond interest rates are substantially higher than the interest rate of the loan, investors can actually make money as a result of defeasance.

The other major prepayment option is yield maintenance, which involves repaying the remaining loan amount, as well as the difference between the loan’s current interest rate and the current U.S. Treasury rate. In contrast to yield maintenance, if market interest rates are lower than the rate of the loan, yield maintenance is the more expensive option for borrowers. 

Taking on Additional Debt

Sometimes, borrowers will want to increase the leverage on their property by taking out a subordinate loan in the form of mezzanine financing. This can increase IRR and may provide the investor additional funds they can use to upgrade the property, increasing its market value.

However, borrowers may not always be able to do this, depending on the nature of their loan agreement. If a borrower takes out additional financing without permission from their servicer, the loan could go into default. In general, an agreement between the servicer and the subordinate lender is managed via an intercreditor agreement, which typically ensures that the CMBS investors are paid off first in the case of loan default.

This often takes creative deal structuring and additional legal fees. Another option to increase leverage is to take on preferred equity investors, which are generally treated as lenders as they get a certain percentage return, but are the second-last (before the equity investors) to get repaid in the case of default. 

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