Donald J. Mancini – Principal
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 90 percent 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
CMBS loans have super low interest rates. Those low interest rates really get investors energized and motivated because that can increase their yield at their property.
However, CMBS loans 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. There is no lender relationship where you can reach out to someone, have a conversation about your loan and restructure it during the term if need be.
These CMBS loans are rigid documents. And if you have something that happens during the term of your loan, that is going to be a problem for you or for the bond holders. It becomes an incredibly high risk situation.
Who qualifies for a CMBS loan?
There are five conditions that I believe you need to meet in order to qualify for a CMBS loan.
If the tenant lease at your property is longer than the term of the loan, you qualify.
If the tenant also has stellar credit investment grade credit, you qualify.
If your property doesn’t need any capital repairs or replacement, 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, you qualify.
And 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, you qualify.
If you check all of those boxes together then I would say you qualify for a CMBS loan. But if you don’t meet any one of those boxes 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 a CMBS loan, also known as defeasance, can be incredibly punitive. There are huge penalties 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.
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Should you have any questions about this article – or any commercial real estate matter – please feel free to contact me at [email protected] or call me at 508-635-6786.