CMBS stands for commercial mortgage-backed securities, and a CMBS loan is a kind of conduit loan. Such loans are considered the backbone of commercial real estate because they provide the liquidity that both lenders and investors require. They are quite different than securing mortgages with residential real estate, and there are five important things you should know about them.
1. CMBS Loans Are Not Standardized.
There is no standardized CMBS loan. What this means is that these loans can vary considerably from one to the next, and there can even be stark differences in the originators that underwrite these loans. This can make it tricky to evaluate and compare these loans. Investors will often rely on experts who specialize in such loans to perform such evaluations and comparisons.
2. CMBS Loans Serve as Collateral.
In the opener, we mentioned that such loans serve as liquidity not just for the borrower but for the lender. CMBS often takes the form of bonds, and the principal and interest go to the investors. The loans are often placed in a trust. The goal often is to keep these trusts highly diversified not just in property type but term and amount, and they can include office buildings, factories, apartments and more.
3. High Minimum Loan Amounts Are Common.
CMBS loans are not the only loan type available for commercial properties. There are at least a half dozen and probably a dozen or more. If you wanted to open a small business and needed a loan to purchase the commercial lot, a CMBS loan probably would not be your best option. That is because these loans tend to have relatively high minimums, such as $2 million.
4. Nonrecourse Is a Feature.
CMBS loans are nonrecourse, which means that the borrower is not personally liable should the loan be defaulted on. This also means that the property itself and any profits from it can be used as collateral. There are cases where a lender can pursue legal action against a borrower, but these are rare, such as when a borrower intentionally damages the property.
5. CMBS Works Different Than Most Mortgages.
Think of the lender in this case as the facilitator. Then, a master servicer steps in for all future dealings unless the borrower fails to make payments. In that case, a special servicer takes over to adjust the loan or use the property as collateral.
The SEC and FINRA have recently passed new regulations that mitigate some of the risk traditionally associated with CMBS. In terms of investing directly in CMBS, this has generally been reserved for the wealthiest investors due to the limited smaller scale opportunities. However, real estate mutual funds do often diversify by dedicating a portion of their funds to CMBS.