Sources to learn about CMBS loans v traditional financing?
Having a hard time understanding the pros and cons of CMBS loans. Anyone have a source to provide clarity on this?
[{"id": "eij6gzl", "text": "You can get a 101 from just googling it. \n\nBut CMBS upside is that it's non-recourse, higher leverage than bank loans, typically have lower rates which are fixed, and particularly attractive on multi-family.\n\nThe biggest downside is that they have heavier prepayment penalties. Also, you typically have to go through a broker and pay a point plus all the other fees. CMBS loans are almost always more fee heavy than bank loans.", "replies": [{"id": "eijc9b7", "text": "Also, that they are a pain in the ass to get anything done during the life of the loan, because you are dealing with an arms-length servicer (who will generally try to avoid doing anything not explicitly required in the loan docs and thus open itself to being sued by the bondholders) as opposed to a relationship bank which made you the loan in the first place and has an interest in keeping you happy. This may include approving new or modified material tenant leases, any changes to the property or ownership structure, and/or negotiating a workout or insolvency situation without you simply handing over the keys.", "replies": [{"id": "eijgrls", "text": "These are all spot on. Id add that you\u2019re likely to be retraded on your rate between quote and locking. The securitization process results in B piece buyers and rating agencies fucking with the subordination and therefore affecting pricing / profit for the originator, so you don\u2019t know your real rate until just before closing. Try to minimize the fees you put up before closing. ", "replies": [], "depth": 3}, {"id": "eikzm04", "text": "Then why don\u2019t owners tap insurance companies or a traditional non CMBS loan? They have no other option?", "replies": [{"id": "eio3upp", "text": "I work in CMBS lending in NY. Owners do utilize numerous products from life co's, banks, debt funds, agency, etc. CMBS is another product that serves as an additional financing option for borrowers. It serves a need. At its peak, CMBS had like 50% market share, now its 20-25% and it will always have a quarter or so of market share because it fills a need that other financing sources cannot fill. ", "replies": [{"id": "eio3z7u", "text": "Thanks Adrian what need does it specifically fill?\n\nAny pros and cons? Thanks", "replies": [{"id": "eio580s", "text": "CMBS is open to financing products in secondary and tertiary markets, cash out refinances, non traditional product types like hotels, manufactured housing, I/O and higher leverage is common depending on the deal. And above all, you are getting a long term (10 years), fixed rate non recourse product. The cons are all mentioned in this thread and those are all valid- servicing experience, pricing volatility, PP, fees. ", "replies": [{"id": "eio6pmh", "text": "Thanks so much! Makes sense ", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "eik1xlb", "text": "So since they have higher prepayment penalties , people are less likely to sell after a short period of time ? Making it hard to hold for (lets say) 7 years and sell . Lowering your IRR at year seven sale because of the pre payment penalty? \n\nIs that a scenario where someone might not want CMBS loan?", "replies": [{"id": "eik28u3", "text": "That's basically right. Cmbs is best suited for people that want to just sit on the asset", "replies": [], "depth": 3}], "depth": 2}, {"id": "eik2uyl", "text": "Another pro is that they are assumable should the owner decide to sell. In effect, the buyer would not need to look for new financing. ", "replies": [{"id": "eik63ph", "text": "It's a trade off. They're assumable because they can rail you with a defeasance of you pay early.", "replies": [{"id": "eik6lbo", "text": "That\u2019s fair. Look there\u2019s no perfect lending product. Depending on the objectives of the sponsor as well as if they\u2019re getting a loan amount of under 25m traditional bank loans are fine. \n\nWhen you start working with 9 figure proceeds, imo cmbs offers more bang for your buck. \n\nAlso the way rates are going - with a traditional floater, one can conceivably be in the 6-6.5% rate by next year. Why not lock in a 4.5 - 5.25% rate now? ", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "eijij35", "text": "[https://blog.stacksource.com/face-off-cmbs-vs-life-co-lenders-716cd2fc4fff](https://blog.stacksource.com/face-off-cmbs-vs-life-co-lenders-716cd2fc4fff)", "replies": [], "depth": 1}]