Understanding CMBS Loans
When it comes to financing large commercial real estate assets, institutional players often look beyond conventional bank loans and government-backed programs. One of the most widely used forms of capital for stabilized, income-producing assets is the CMBS loan—short for Commercial Mortgage-Backed Securities. These loans provide non-recourse, fixed-rate financing with generous proceeds and long terms, making them a powerful tool for many real estate investors and sponsors.
What Is a CMBS Loan?
A CMBS loan is a commercial mortgage that is bundled with other loans, securitized into bonds, and sold to investors in the capital markets. Also known as conduit loans, these loans are originated by lenders but do not remain on their balance sheet. Instead, they are packaged into a trust (REMIC) and split into tranches with different levels of risk and return.
CMBS loans are commonly used to finance office buildings, retail centers, industrial properties, hotels, and multifamily assets—as long as the property is stabilized and generating predictable cash flow.
Key Features of CMBS Loans
Loan Size:
Typically $2 million to $100+ million
Best suited for mid- to large-sized assets
Loan Term:
Usually 5, 7, or 10 years
Often structured with interest-only periods or full interest-only payments
Amortization:
After any interest-only period, the loan may amortize on a 25- or 30-year schedule
Interest Rates:
Fixed rates tied to U.S. Treasury yields plus a spread
Generally lower than traditional bank loans due to securitization
Loan-to-Value (LTV):
Up to 75% LTV for strong assets
Lower for assets in secondary/tertiary markets
Debt Service Coverage Ratio (DSCR):
Typically 1.25x or higher
Non-Recourse:
No personal guarantee for the borrower
Carve-outs apply (e.g., for fraud, misrepresentation—“bad boy carve-outs”)
Pros and Cons
Advantages:
Non-recourse structure protects borrower’s personal assets
Fixed-rate financing provides predictability
Ideal for long-term hold strategies or portfolio recapitalizations
Disadvantages:
Rigid structure—very little room to renegotiate terms
Difficult or costly to prepay due to defeasance
Limited operational flexibility (e.g., leasing covenants, reserve requirements)
Special servicing risk—can become adversarial in distress situations
Not suitable for value-add or transitional assets