Real estate is obviously big business – and commercial loans have become quite competitive to meet the demand. As such, the situation for real estate investors is very promising; the existence of CMBS conduit loans (Commercial Mortgage-Backed Securities) can serve as a one-shoe-fits-all type of solution for your real estate investment needs. In this short article, we’ll take a look at the specifics of this CRE investment vehicle.
The Skinny on CMBS Conduit Loans
Generally speaking, small banks do not offer Commercial Real Estate loans of this caliber, as the CMBS conduit loan is usually offered by conduit lenders and investment banks that form a syndicate. In particular, their advantage over the smaller loans offered by banks is that these mortgage-backed securities give you increased leverage while also offering fixed rates, and thus minimize the risk that you undertake.
The best uses for CMBS conduit loans are to purchase properties that produce reliable income – this would include hotels, multifamily residential buildings, storage buildings, and office buildings just to name a few.
Pros and Cons of Conduit Loans
The pros have been mentioned already; the cons concern issues with loan flexibility. Conduit loans in general have elevated tax law requirements when compared to other loans, which means that you the borrower have a diminished ability to negotiate loan terms to better suit your specific business. As such, more care must be given to business projections, since future funding requirements cannot easily be grafted into your current agreement.
Additionally, there could – there usually is, in fact – fiduciary penalties for conduit loan prepayment. Due to the competitive nature of the loan sphere, most conventional loans eschew prepayment penalties – but of course, they do not quite have the range of real estate securities, which tend to offer a lot more investment aid. Nonetheless, it is necessary to factor this in, as prepayment due to an especially successful real estate venture can still leave you responsible for the interest lost on the loan.