CMBS conduit loans are loan options that you can use to purchase commercial property. Unlike a traditional mortgage loan, these are packaged loans sold to investors on a secondary market. This is a process called securitization. You can expect these loans to be different from typical commercial real estate loans.
What Is a Conduit Loan?
A packaged conduit loan comes with other commercial mortgages in a trust. Once you sell your loan to investors, some aspects of the loan changes. The changes include how the loan is administered, who you deal with and how payments are made. Often, a conduit loan has a balloon payment at the end of five or 10 years. The loan itself, however, follows a 20 or 30-year amortization period. What this means is that you have monthly payments as if this were a 20-30 year loan, but you pay it off in 10 years.
How Prepayment Differs
With traditional mortgages, prepayment penalties are calculated as a percentage of lost interest. With CMBS conduit loans, on the other hand, prepayment happens through defeasance or yield maintenance. Defeasance is when you free the property from the lien, but the loan stays outstanding. This allows borrowers to sell or refinance the property. Bonds are used as new collateral and need to generate interest to cover future payments.
With yield maintenance, the lender charges if the borrower wants to pay off the loan early or refinance the loan. If a borrower prepays a loan, the lender loses out on interest. The prepayment penalties allow for the lender to recoup on the interest charges.
How Loan Administration Differs
After securitization, you will no longer be dealing with a lender. Instead, the loan goes into a REMIC trust. You work with a commercial mortgage servicer instead, known as the Master Servicer. The Master Servicer is who you make the payments to. The servicer manages the day-to-day servicing of a loan. In addition to collecting payments, the servicer manages escrow accounts, inspects the property and reviews any requests from the borrowers.
If you stop making payments and if the loan goes into default, then it goes to a Special Servicer. The Special Servicer helps you modify the loan. He or she can help you change the loan terms, defer or forgive interest and fees or foreclose on the property.
If you invest in commercial real estate, there are several different financing options. It helps to know the difference between CMBS conduit loans and traditional commercial loans. This way you can pick which works best for you.