For an income producing property, such as a commercial building, hotel, apartment complex or storage unit, a traditional loan may not be the best option. CMBS conduit loans can better provide the funds for these types of real estate ventures. While these loans have been available for the past 20 years, many people are unfamiliar with them and how they work. If you are considering a loan for a real estate property that will generate income, then you should take a quick look at this guide to conduit loans.
What Is a Conduit Loan?
Traditionally, loans have a portfolio held by a lender and it remains in that lender’s hands through maturity. With CMBS conduit loans, each loan is securitized. This means that within typically two years of the loan approval, it is placed into a pool with similar loans and sold to investors. The pool of loans is held in a trust and used as collateral. Payments on the loan are then made to the commercial mortgage servicer who makes sure that the funds are dispersed according to the terms of the loan.
What Are the Benefits?
One of the big draws of a conduit loan is that there are fixed interest rates that can be extremely low. This is the biggest advantage of the loan since most of these loans are for millions of dollars. Even one interest point will make a significant difference when paying interest on a loan that is over a million dollars so getting the lowest rate possible is critical. If you are seeking high leverage, that is another benefit of this type of loan. The loan is also non-recourse which means that if you default on the loan, the collateral will completely cover the expense of the loan which makes it less risky for you as the borrower.
What Are the Less Favorable Aspects?
As with any loan, there will be less favorable aspects of a conduit loan. For example, there are prepayment penalties on this type of loan. Prepayment on CMBS conduit loans is defeasance which means that you would have to purchase some sort of collateral to replace the loan, such as a US Treasury bond. When considering any loan, it is important to read through all conditions and agreements before signing on the dotted line to ensure that the loan is appropriate for your business needs.
When seeking lending for a commercial real estate venture, it would be worth your time to pursue CMBS conduit loans. It could be beneficial for you and your business.