Ultra-high net worth individuals, family offices, and investment companies are typically the only ones who can invest directly in commercial mortgage-backed securities. By purchasing shares of a mortgage-backed securities exchange-traded fund (ETF), retail investors can participate in CMBS debt. This allows a smaller investor to take advantage of the fixed income returns offered by CMBS loans while also diversifying risk.
As a potential investor or investment consultant, whatever option you choose, proper awareness of market conditions and trends should be part of your due diligence. A CommercialEdge subscription grants you access to in-depth research on commercial real estate in markets across the United States, including extensive property data, sales, ownership, debt, and lease data.
Who buys CMBS bonds and why?
You can buy individual commercial mortgage-backed securities. However, they are frequently held by affluent people, investment firms, or exchange-traded fund managers (ETFs).
Are CMBS securities publicly traded?
Investors in CMBS bonds have the chance to check loan files and disclosure statements before acquiring the bonds because they are publicly traded.
What company sells CMBS?
CMBS lenders and life insurance firms frequently compete for large real estate acquisitions. Both have substantial benefits as well as drawbacks. For example, life company loans often have cheaper rates and better loan servicing, whereas CMBS loans are more easier to obtain and come with features like as interest-only periods (and even full, interest-only loans).
The Benefits and Drawbacks of CMBS Loans
CMBS loans are among the most straightforward multifamily loans to obtain, especially if a borrower is searching for a large loan with a low interest rate. Most loans are asset-based, which means that a borrower doesn’t need need good credit to get approved as long as the property can generate enough revenue (a minimum DSCR of 1.20x is typically required). Furthermore, CMBS lenders often provide leverage of up to 75 percent LTV, which is quite generous given that they frequently lend to properties in secondary or tertiary markets.
CMBS loans, on the other hand, typically do not provide a good servicing experience for borrowers; because these loans are securitized and sold on the secondary market, borrowers cannot anticipate any help if they are having difficulties paying their mortgage payments. Furthermore, service is frequently outsourced to a separate company (not the original lender), who may not be aware of the borrower’s demands. Finally, CMBS loan rates can fluctuate dramatically before closing, even though the great majority of CMBS loans are fixed-rate.
The Benefits and Drawbacks of Life Company Loans
In general, life company loans have lower rates than CMBS loans and, unlike CMBS loans, provide borrowers with an excellent service experience. Because life insurance firms keep these loans on their books, a borrower can talk to their lender immediately about any issues or concerns. In addition, unlike CMBS loans, life company loan rates are frequently locked during the application process, so borrowers won’t have to worry about rates soaring dramatically before closing. Life company loans have much longer durations than CMBS, with many life companies offering fully amortizing loans of up to 25 years.
Despite their advantages, life company loans are not appropriate for all borrowers. For starters, unlike conduit lenders, life companies have famously strict lending rules; most assets must be Class A commercial real estate in a large MSA and, unlike conduit lenders, life companies will typically go deep into borrowers’ financials. Furthermore, life insurance firms do not provide nearly as much leverage as CMBS lenders, with maximum leverage of 70% and many companies only offering 50-55 percent leverage.
Who are the Top Life Company Lenders?
It’s far more difficult to find information about life company lenders than it is about CMBS lenders, because life company lenders are much less likely to post lending statistics than CMBS lenders, who eventually sell CMBS on the open market. Life insurance firms, on the other hand, offered $59.1 billion in commercial and multifamily real estate loans in 2015. Northwestern Mutual, Pacific Life, New York Life, Manhattan Life, MetLife, Prudential, Mass Mutual, and TIAA-CREF are now some of the largest lenders in the industry.
Who purchases CMBS?
Conduit Lenders, commercial banks, investment banks, and bank syndicates package and sell these loans. A CMBS Loan has a set interest rate (which may or may not include an interest-only period) and is amortized over 25 to 30 years, with a balloon payment due at the conclusion of the term.
What makes CMBS investors money?
The process of navigating the CMBS market can be perplexing and difficult. Here are three CMBS strategies to improve your negotiation position and guarantee you don’t leave anything on the table.
Keep in mind that this is not a car loan or even a home loan.
If your attorney or broker doesn’t have at least 30-50 individual comments on a loan agreement (not counting the substitution of “sole and absolute” for “fair”), you’re wasting money and taking unnecessary risks.
The key to a well-negotiated loan arrangement, like the legal system, is communication “There is a precedent.”
It’s likely that if it’s been done before, it can be done again.
If a desired change does not result in a lender requiring more securitization representatives and guarantees, it is likely to be accepted without opposition.
It is also likely to be accommodated if it does not contradict a published rating agency requirement (permitted indebtedness, major modifications, insurance requirements, etc.).
By definition, CMBS lenders are wholesalers (or merchants).
They buy wholesale (originate) and sell retail (securitize).
They aren’t in the buy-and-hold business.
The strategy is to originate loans at greater interest rates than those that can be sold in the bond market later.
Every 14 basis points of interest rate beyond what the underlying bonds trade for equal to 1% of lender profit on a ten-year loan.
For every 1 percent of lender profit on a five-year loan, the math becomes 25 basis points.
This is a function of bond duration, or to be more precise, the inverse of bond duration (for the nerds out there).
In today’s market, the average intended loan profitability is 1-3 percentage points, with a hold period of 1-3 months before securitization.
The average loan should provide an annualized return on investment of 12 percent (0.02 2 12) if both profitability and hold term are assumed to be in the middle.
Why should a borrower care about this?
In the last 12 months, CMBS spreads have risen by about 100 basis points, with the majority of the shift occurring in the last 4-6 months.
As a result, re-trades have become all too common.
From application through closure, the simplest method to avoid a spread re-trade is to be aware of both how much money your lender is aiming to make as well as any underlying moves in the CMBS bond market.
If you are aware that blended 10-year bond yields have risen 10 basis points and your lender is requesting an additional 24 basis points to close your loan, you should speak up and tell your lender that you are not willing to allow them to profit an additional 1% (6 percent annualized!) for no reason.
And, even after factoring in increased spreads, if the lender originally priced your loan to make 2 percent points and is still making more than 1 percent, there is no reason to re-trade!
If you think you’ll be able to pay off your loan early, you may have already squandered three to four months’ worth of interest.
A typical loan arrangement will require you to pay the debt off before it matures.
A well-negotiated loan arrangement will only need prepayment until the end of the term “The “open period,” which is usually 90-120 days before maturity, is a term used to describe the time period between when a security is issued and when it
What your lender doesn’t tell you is that bond purchasers always believe your loan will be paid off by the open period’s start date, and bonds are priced accordingly.
As a result, agreeing in advance to prepay the last 90-120 days of interest is a future loss for you and a future gain for the bond investor.
Even though loan servicing has a modest profit margin, it is nonetheless profitable.
Lenders sell loan servicing to third-party servicers for this reason, which increases their overall upfront profitability.
Be aware of brokers who offer to place your loan for free in exchange for only the servicing rights.
There is no such thing as a free lunch here.
If a lender relinquishes the servicing rights to a loan, “It must compensate for the loss of profit by charging a greater spread to the borrower.
Furthermore, most lenders will not agree to sell servicing rights on an individual loan basis, limiting the pool of lenders to which the broker can contact.
As a result, people promising to arrange a loan should be cautious “in exchange for such servicing rights “for free” are not acting in your best interests.
Brian Holstein, the author, is a Partner with US Hotel Advisors.
Brian has closed over $800 million in hotel mortgage, mezzanine, and preferred equity financing, as well as investment transactions, since 2012.
Prior to 2012, Brian worked as a banker for RBS Greenwich Capital, where he closed more than $1 billion in commercial real estate loans and underwrote more than $20 billion in loans.
Brian’s background as a broker and banker allows him to gain insight into the underwriting, pricing, negotiating, structuring, and closing of loans and investment deals from the inside.
Brian’s unique, hands-on, full-service approach ensures that you get the greatest possible execution from start to finish.
What is the procedure for obtaining a CMBS loan?
Most lenders require that you have a net worth of at least 25% of the entire loan amount to qualify for a CMBS loan. In addition, liquid assets must account for at least 5% of the overall loan amount. A CMBS loan is normally provided with terms of 5, 7, or 10 years and an amortization of 25 to 30 years.
What is the size of the CMBS market?
One source of commercial real estate financing is not taking a break this summer as the country tries to get back to normal. The low volume of new conduit transactions is more than offset by a large number of single asset single borrower (SASB) and commercial real estate collateralized loan obligations (CRE CLO) deals, giving private-label commercial mortgage-backed securities (CMBS) a successful year. As of the end of the first quarter of 2021, private-label CMBS accounted for around 14% of the overall CRE finance market, according to the Mortgage Bankers Association’s Mortgage Debt Outstanding Report.
How do CMBS become traded?
A mortgage-backed securities (MBS) is a type of asset-backed instrument that is sold on the secondary market. An investor who purchases a mortgage-backed asset is effectively lending money to home buyers. In exchange, the investor receives the rights to the mortgage’s value, which includes the borrower’s interest and principal payments.
Why are CMBS attractive to borrowers?
There are two types of commercial loans that investors should be familiar with while studying about them: portfolio loans and CMBS loans. A portfolio loan is a mortgage loan that the original lender keeps for the duration of the loan rather than selling it on the secondary market. A CMBS loan is a mortgage loan that has been pooled with other loans and transferred to a trust. Investors can acquire bonds from the trust that vary in yield and payment term depending on the level of risk they are willing to take on.
Investors like CMBS loans because they have a lower risk of prepayment than other mortgage investments. This is due to the fact that commercial mortgages are typically for a set period of time. These loans also provide investors with risk and reward flexibility, as they can select bonds based on the yield they desire. When the interest on all of the pooled loans is broken down and paid out to each individual investor, investors receive a monthly return on their investment. The highest-rated bondholders are paid first, followed by the next-highest, and so on. The “waterfall” method of payment is what it’s called.
Commercial mortgage-backed securities, like any other investment, carry risk. As long as the borrower does not default on their loan, investors who chose higher-risk bonds stand to earn the most. When debtors default, however, investors lose money. The investor absorbs only the interest payments, not the principal, with lower-risk bonds. This means a lower rate of return, but a lesser danger of losing money.
Borrowers like CMBS loans because they frequently have lower interest rates than regular commercial loans. However, these loans have a significant prepayment penalty and give borrowers less flexibility in repaying the debt. The mortgage industry as a whole benefits from CMBS financing because it raises the amount of money available to everyone involved. This is owing to the security’s structure, which allows the bonds backed by the loans to be valued more than the loans themselves.
The lending institution, the borrower, and the investor all gain from CMBS loans. They enable investors to assume calculated risks in exchange for a greater return than government bonds and a lower risk than real estate investment trusts. They enable lenders to make additional loans by passing on the cost to investors, so increasing the amount of capital accessible. Finally, they assist borrowers by making funding more accessible and inexpensive.