A Commercial Mortgage-Backed Security (CMBS)/conduit loan is a commercial real estate loan. It is unlike most commercial loans since it is sold to investors via a secondary market, ultimately altering its administration and the stipulations behind it. This type of loan does not come with strict credit standards and typically has a five or ten-year term. Here are three notable facts about CMBS conduit loans.
1. They Have Fixed Interest Rates
The majority of CMBS conduit loans have fixed interest rates. These rates are lower than many of the rates associated with conventional commercial mortgages. On average, interest rates for conduit loans range from 3.5% to 5.3%. The U.S. Department of the Treasury plays a role in the determination of the rates for these loans. The rate that the U.S. Treasury utilizes for a particular term is added to a margin to yield an individual’s base rate; note that the individual’s credit history and the revenue generated by his or her commercial property are also taken into consideration when devising the rate.
2. They Are Non-Recourse
Most CMBS loans are non-recourse in nature. Borrowers are not personally responsible for the repayment of non-recourse loans. Oftentimes, to obtain a non-recourse loan, an individual would need collateral, such as real estate; however, he or she does not have to provide a personal guarantee. Since they are non-recourse, conduit loans are regarded by many as advantageous. Although, it is worth mentioning that one could be held liable for a conduit loan if there is deliberate damage to the commercial estate used to acquire it.
3. They Are Fully Assumable
Many CMBS loans are fully assumable, meaning that someone other than the original borrower can take charge of the loan. Due to prepayment penalties, it is hard for many business owners to maneuver their way out of CMBS financing obligations early on. This is why many have found the assumably associated with conduit loans very attractive. A businessman can sell his commercial property and have the person or people who purchased it assume his conduit loan; he may have to pay a loan assumption fee, but he does not have to pay penalties like yield maintenance.
Commercial property owners should learn as much as they can about the rules and regulations behind CMBS loans. These loans may be a better option for them than the traditional commercial mortgages offered by banks and other establishments.