CMBS Loans: Can They Help Real Estate Investors?

A relatively new concept in commercial real estate lending began gaining some ground in the mid-nineties. Commercial Mortgage Backed Security (CMBS) conduit loans feature commercial mortgages placed together in packages with similar type loans and sold to investors. These loans can offer some flexibility and variance for securities investors that purchase them. For example, when placed together in packages like this, the different parts of the loans can be sold separately. By dividing the loans into different risk factors, more portfolio risk tolerances can be served. CMBS conduit loans can make excellent investments since they may provide a return income that is both steady and long-term. However, the question remains, are CMBS conduit loans a good vehicle for real estate investors?


For the real estate investor, these types of packaged loans can provide a few benefits that might make them worthwhile to consider. First, the defeasance provisions of these loans can make them attractive to real estate investors who plan to resale, or flip, the property. Defeasance is a procedure in which the borrower can replace the collateralized property he is purchasing with equivalent valued Treasury notes or securities. This process, in effect, unencumbers the property while potentially continuing the loan investor’s steady, long-term income. Also, through defeasance, the original terms of the commercial mortgage remain in effect at what are usually more favorable terms for the borrower than originating an entirely new contract. The end result is usually beneficial to both parties. The loan investor will likely continue to receive the expected return on their investment. The real estate investor has potentially created options to resale the property at a profit or repurpose the property if the likelihood of an even higher profit is apparent.


These financial instruments tend toward the complex side, and many real estate professionals prefer to use financial experts to execute the details of this type of deal. The requirements of the various state and federal agencies that oversee these types of dealings typically preclude amateurs from handling the proceedings themselves. Not to mention the fact that heavy tax burdens can result if all aspects of the deal are not handled properly. CMBS conduit loans are not usually considered the most popular financial vehicle used as a real estate investment tool. Part of this possible underutilization may be due to a lack of awareness on the part of investors. Some real estate investors may simply think that these loans are just too complicated to not be risky. However, the potential savings a savvy investor with the right financial professional help could realize might make negotiating the complex issues involved worth the effort.

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