How to Use CMBS Conduit Loans

If you are in business, there are several options available to you should you require additional capital for your business. One such option is that of the CMBS loan, which also commonly known as a conduit loan. The acronym CMBS stands for Commercial Mortgage Backed Securities. As the name states, the loan is commercial, for businesses such as apartments, hotels, retail establishments and others. Mortgage backed securities, although it sounds complicated, merely means that a borrower is backed by giving a bond or collateral against their property. The reason that these loans also share the name of conduit or are mentioned in conjunction with conduit is because the bank does not take the primary position of lender, but actually acts as a liaison between lenders and borrowers, by consolidating the funds from multiple borrowers into one loan and presents them to the perspective borrower. CMBS conduit loans provide benefits for both the borrower and lender.

Advantages of CMBS

For those who are not familiar with CMBS loans, they have not been in formal existence that long. CMBS loans were created in the 1990s and most closely resemble the scheme laid forth by mutual funds. However, whereas mutual funds are strictly for individual investors, CMBS conduit loans are for corporations with a minimum of at least $2 million in most cases. Borrowers who look to this option do so because the loan typically has more attractive interest rates and can be renegotiated. Another reason CMBS conduit loans are attractive to borrowers is that there is very little recourse against borrowers unless they outright default. Conduit loans are attractive to investors because they tend to be lower risk because just as borrower gets range of investors, investors get a portfolio of a range of borrowers. In essence, even if one borrower defaults, investors have less of a chance of a total loss.

How to Obtain a CMBS Loan

A borrower who wants to obtain CMBS loan does not have to seek a traditional lender, but can opt to go through different financial firms such as pension firms or insurance companies. In fact, many of the smaller lending institutions do not offer conduit loans. To apply for a CMBS loan, a borrower needs to fill out an application. Once the loan is approved, it also has to be securitized. A securitized loan has been underwritten, which is insuring against loss. Instead of paying the amount borrowed back to the lending institution, the borrower pays a mortgage company, who in turn distributes the payments back to the investors. Investors in a CMBS loan receive a bod certificate, often called a pass-through certificate.

Uses of CMBS

CMBS conduit loans are typically used when a company is building, expanding or renovating. And the revenue from the expansion is often what is used to pay back the loan. However, prior to securing one, borrowers should be aware of any prepayment penalties. In addition, most CMBS loans will not be approved for purposes of avoiding bankruptcy.

CMBS conduit loans are great options for businesses. Whether it is a warehouse or a restaurant, investing in this type of loan from both a borrower and investor standpoint are excellent ways of building capital.