If you’re in the business of buying and selling real estate you’ve probably heard of Commercial mortgage-backed securities (CMBS). These loans have many benefits for both investors and borrowers. CMBS loans are fixed-income investments and are based on mortgage real estate properties. Develop an understanding of how these loans work as well as the pros and cons of CMBS loans.

What is a CMBS Loan?

CMBS loans are funded by a group of lenders. These series of loans are referred to as bonds. They are also called conduit loans. CMBS loans are commonly used to fund real estate investments. Apartments, retail locations, and multifamily homes are examples of real estate ventures commonly funded by CMBS loans. Income earning properties serve as a backup for these types of loans. 

How Do CMBS Loans Work?

CMBS loans are held in a trust fund. Borrowers close on properties by using the first loan issued by the loan company. CMBS loans are diversified according to the types of real estate, the terms, and the loan itself. The debt to income ratio, the size of the loan, as well as the number of loans also plays a part in diversification and how the loans are rated. These loans/bonds are sold to different investors based on these ratings. The original lenders are paid in full when CMBS loans are fully paid off. This process generates more revenue for banks. These loans benefit both loan holders and lenders because lenders can offer more loans and investors get early access to commercial properties. 

The Mechanics… 

CMBS loans are grouped with similar loans according to the risk associated with the loan. Of course, the highest-rated loans are those that have the least risk. These are the loans that are typically paid off first. On the other hand, lower-rated CMBS loans are those that carry higher risks and come with the possibility of more loss if a loan holder defaults. These loans are grouped and sold to investors which are referred to as securitization. CMBS lenders perform as many as three to eight securitizations yearly. These securitizations are based on the loan itself as well as the scope/size of the lender. If you’re considering a CMBS loan, reach out to us. We’re here to answer all of your questions.