3 Benefits to Using CMBS Loans for Commercial Real Estate
Commercial mortgage-backed securities, or more commonly known as CMBS loans, are commercial real estate mortgages that lenders lump together and place in a trust for investors to purchase as bonds. These commercial loans typically start around two million dollars, which creates risk for the lender and investors, but can yield significant rewards as long as borrowers pay their bills. Here are a few financial benefits that borrowers can reap from this type of financing.
- Fixed Interest Rates
Low, fixed interest rates are a commercial real estate owner’s dream. Due to the nature of mortgage-backed securities, interest rates are usually lower than traditional commercial mortgages. Rates are also fixed, which provides security and reliability for the borrower. Some CMBS loans include an interest-only period, anywhere from one to seven years, then require a lump sum payment for the principle or monthly principle payments. The lump sum option may or may not be advantageous depending on the borrower’s overall financial strategy. The borrower can also choose to refinance the mortgage once the interest-only period is complete.
- Fixed Term
Financial stability is always favored over variable terms and conditions. In order to make interest rates low, this type of loan offers a fixed repayment term. Most lending agencies define 25 to 30 years for the term, but banks sometimes offer 20 to 25 years. Fixed term mortgages provide reliability and spread out the cost over a longer time period. There may be penalties for overpaying or paying off the mortgage before it matures, so be sure to check the loan provisions to avoid facing additional fees.
CMBS loans are non-recourse, which means the borrowers are not personally liable if they default on their loans. The commercial property is designated as collateral, so borrowers do not have to offer their personal assets to secure the loans. This protects borrowers from personal loss in the event of default and foreclosure. However, there are provisions for “bad boy carve outs” such as fraud, negligence and criminal behavior, where borrowers are penalized for causing intentional harm to the property or acting outside the terms of the loan agreement.
CMBS loans can be advantageous for responsible borrowers looking for low interest rates and non-resource agreements. Though this fixed term loan does not provide repayment flexibility, borrowers can always refinance the mortgage after the interest-only period passes. If you are a commercial real estate investor looking for financing, talk to your lender about how a CMBS loan can support your investment.