Donald J. Mancini – Principal
Hello everyone and welcome back to another episode of Maximize Your ROI with Don Mancini. Today I want to talk to you about CMBS loans and the message I’d like to convey to you is that as attractive as CMBS loans can be they most likely aren’t the right loan structure for you.
How do I know? Because I’m going to tell you that 90% of my clients that I’ve done business with over the years do not qualify for a CMBS loan. It’s not the right structure for them. And when I say do not qualify, I mean they do not qualify for my approval for them to do a CMBS loan.
CMBS loans can be incredibly attractive. They have super low interest rates and those low interest rates really get investors energized and motivated because that can increase their yield at their property. However they are incredibly restrictive. They are finite documents. They are sold as a bond on Wall Street and then sold off to a whole bunch of investors. So there is no lender relationship there where you can reach out to someone, have a conversation about your loan, restructure it during the term if need be.
These are rigid rigid documents. And if you have something that happens during the term of your loan, your CMBS loan, that is going to be a problem for you or for the bond holders. I’m telling you guys all bets are off and it becomes an incredibly high risk situation.
So who qualifies for a CMBS loan? As far as I’m concerned, you qualify if the tenant lease at your property is longer than the term of the loan, you qualify. That’s box number one.
If the tenant also has stellar credit investment grade credit you qualify. That’s box number two.
If your property doesn’t need any capital repairs or replacement, the roof is going to last 15 plus years, parking lots going to last 15 plus years. That’s box number three you qualify.
If there’s absolutely no possibility that you’re going to sell during the term of the loan. None whatsoever. No matter even if someone offered you way more than the property’s worth if you can say that then you qualify. Check another box.
And then finally if you can guarantee that during the term of the loan you’re not going to die and that your estate isn’t going to want to or need to sell the property either because they don’t want to operate and manage it or because they need to sell in order to raise the revenue to pay estate taxes.
If you could check all of those boxes together then I would say you qualify for a loan but if any one of those boxes you cannot check you do not qualify for a CMBS loan. Primarily because that’s going to put you in a position during the term that you don’t want to be in.
The prepayment penalties associated with this loan, also known as defeasance, can be incredibly punitive. Huge huge penalties and guys that will crush your ROI and can nowhere near justify the extra quarter of a point or half a point savings you’re going to get on the interest rate.
So please think very long and hard about whether a CMBS loan is right for you. If you have questions or you want to bounce something off of me, feel free to reach out and call me send me an e-mail. I’d be happy to talk to you about your property. Thanks again for watching. And I look forward to seeing you on the next episode.