Understanding CMBS Loans

David Cohn
Mar 26, 2024
CMBS Loans

Key takeaways: 
  • CMBS loans are a distinctive commercial real estate financing type that benefits lenders and borrowers
  • These loans are backed by a pool of income-generating CRE     assets (usually consisting of shopping centers, office buildings, hotels,     and other income-generating properties) that together act as collateral.
  • CMBS loans let borrowers enjoy extended loan terms and access capital at competitive interest rates, making them a suitable financing method for long-term projects.
  • Meanwhile, lender scan use these loans to diversify their investment portfolio and reduce exposure to individual loan defaults by spreading the risk across a pool of mortgages.

What is CMBS loan?   

A commercial mortgage-backed security (CMBS) loan refers to a commercial mortgage pooled with similar mortgages and then sold as a security to investors on the secondary market. Known as conduit loans, these financing options are characterized by their non-recourse nature and relatively low interest rates.

Secured by a first-position mortgage on commercial property, CMBS loans give investors a substantial likelihood of recovering their money in default (as their claim is prioritized over other financial encumbrances). The security of the first-position mortgage also allows lenders to offer CMBS loans with lower interest rates than unsecured loans.

CMBS loans originate from commercial banks, conduit lenders, or investment banks. After issuance, these loans are bundled and sold to investors. By spreading the risk among multiple investors, CMBS loans can have lower interest rates than traditional commercial real estate loans held by a single bank.

As a result, borrowers can secure a more significant loan amount (higher leverage) than conventional options, allowing them to finance a more substantial portion of the property purchase.

CMBS loans: Common features  

CMBS loans offer fixed interest rates, making them a predictable financing option for borrowers. Term lengths range from 5 to10 years, and amortization periods range from 25 to 30 years. This extended amortization period can significantly lower monthly payments.

One of the most attractive aspects of CMBS loans is their non-recourse nature. If a borrower defaults, the CMBS lender cannot pursue the borrower's assets to recover the debt. 

They also offer full assumability. This allows borrowers to pass the loan on to a new owner if they sell the financed property. This quality makes CMBS loans highly appealing for investors seeking to keep their options open.

CMBS loans: How they work  

The process begins with a conduit lender issuing a CMBS loan and other loans to create a commercial mortgage-backed security. These securities are then traded on the open market and function similarly to bonds.

Investors can buy and sell these securities to fully exploit their liquidity and potential for good commercial real estate market yields.

CMBS financing is particularly well-suited for projects that might not align with the criteria of agency lenders such as Fannie Mae or Freddie Mac.

This is because the underwriting process for CMBS loans focuses more on the asset itself. It, therefore, offers flexibility to borrowers with challenging credit or legal histories (like a recent bankruptcy or a less-than-perfect financial record).

CMBS loans are also faster. The closing process is shorter with fewer bureaucratic hurdles because it focuses on the income generated by the property rather than the borrower's creditworthiness or the property's visual appeal.

Unlike commercial bank loans, in which borrowers may deal with the originating lender throughout the loan's life, CMBS borrowers interact with a master servicer for the loan's duration.

Should they default, special servicer steps in, prioritizing investors' interests over the borrower's needs, which can complicate matters for the borrower?


Investors often compare CMBS to residential mortgage-backed securities (RMBS) based on residential mortgages.

While CMBS and RMBS share similarities in how they are securitized, CMBS stands out due to their unique call protection features and the balloon maturity provision.

1. Call Protection 

CMBS are safeguarded against premature repayments, making their trading characteristics closer to that of corporate bonds. This protection is offered structurally or at the individual loan level

  • Structural call protection is implemented through sequential-pay tranches, which ensures that principal repayments are directed first toward the tranche with the highest priority. Payments continue this way until that tranche is fully satisfied, after which the subsequent tranche receives payments. This setup protects senior investors by prioritizing the repayment of higher-rated tranches before moving to those with lower ratings, thereby guarding against early repayments and mitigating various risks.
  • Loan-level call protection is achieved through three key strategies: a prepayment lockout (restricting any early repayments for a certain period), prepayment penalty points (charging borrowers a fee for refinancing before a predetermined time), and defeasance (permitting early repayment but requiring the borrower to substitute the loan with a portfolio of government securities that mimic the original loan's cash flow).


2. Balloon maturity provision 

Unlike residential mortgages, commercial mortgages typically do not amortize fully over the loan term. They require borrowers to pay interest and some principal during the loan term and then pay a substantial "balloon" payment upon maturity.

There's a risk that the borrower may be unable to afford this large final payment, introducing what's known as balloon risk. This risk might lead to an extension in the loan's term, referred to as a workout period, essentially a form of extension risk.

CMBS loans: Eligibility properties  

CMBS loans can fund commercial real estate properties, including retail, office, and mixed-use spaces. 

CMBS lenders particularly favor retail properties if they feature robust and long-term anchor tenants and are under the management of seasoned organizations. 

Office properties also draw interest in the CMBS loan market. These loans can be used for acquisition, cash-out refinancing, or rate and term refinancing of Class A and B office spaces. 

In recent years, mixed-use properties have also gained traction. CMBS loans can finance many of these properties, from small apartment buildings with few commercial tenants to large-scale mixed-use developments.

CMBS loans: Requirements 

1. Loan-to-value (LTV) ratio 

The LTV ratio measures the loan amount against the appraised value of the commercial property. Lenders use this financial metric to determine the likelihood of recovering their investment in the event of a default. 

A lower LTV ratio means that the borrower has more equity in the property, thereby reducing the lender's risk. If the property's value decreases, properties with a lower LTV have a cushion that protects the lender's investment. This is why lenders prefer lower LTV ratios. 

Regarding CMBS loans, lenders typically approve properties with an LTV ratio of up to 75%, meaning the borrower must bring atleast 25% of the property's value as equity.

2. Debt service coverage ratio (DSCR)

The DSCR is the net operating income divided by the property's total debt service. It measures the cash flow available to pay current debt obligations, indicating the property's ability to generate enough income to cover the loan payments.

A DSCR of 1 means the net operating income exactly covers the debt service, leaving no margin for error or additional cashflow for the borrower. 

Lenders typically look for a DSCR between 1.25and 1.35 times or higher, which signifies that the property generates enough income to cover the loan payments comfortably.

Additional cash flow is a buffer in case of unexpected expenses or income fluctuations. This ratio ensures the property can sustain itself financially and continue to service its debt even in less-than-optimal conditions.


3. Debt yield 

Lastly, the debt yield (calculated by dividing a property's net operating income by the loan amount and multiplying by 100)reflects the cash flow generated relative to the loan from the lender's viewpoint.

It measures how quickly a lender could recoup their investment if the borrower defaulted and the property had to be sold. It provides a snapshot of the loan's security independent of market interest rates or amortization schedules. 

CMBS lenders prefer properties with a debt yield of 7% or higher, indicating a lower risk of loan default. This threshold is a general guideline and can vary depending on the property type, location, and market conditions.

A higher debt yield suggests that the property generates a significant income relative to the loan size (meaning the lender has a better chance of recovering their funds in a foreclosure scenario).

This safeguard for the lender ensures that even in the worst-case scenario where the property needs to be sold quickly, the sale proceeds are likely to cover the outstanding loan balance. 

CMBS loans: Other requirements

Some lenders require borrowers to demonstrate financial strength, even focusing on the property's income. Typically, a borrower must have a net worth of at least 25% of the loan amount and liquidity of at least 5% of the loan amount.

The net worth requirement demonstrates the borrower's financial stability and ability to weather potential setbacks.

The minimum liquidity requirement assures the lender that the borrower has some financial reserves (readily available cash or near-liquid assets) to cover unexpected expenses or short-term gaps in the property's income.


CMBS loans: Benefits 

By offering competitive rates, extended terms, and unique features like non-recourse clauses and the ability to be assumed, CMBS is a viable financing option for a wide range of commercial real estate investments. Let's take a closer look at its many benefits:

1. Accessible 

CMBS loans are accessible to many borrowers, even those who traditional lenders might turn away due to poor credit, past bankruptcies, or failure to meet stringent collateral/net worth requirements.

2. Non-Recourse 

The non-recourse nature of CMBS loans means lenders cannot seize personal property to settle the debt in case of default. That said, it's crucial to be aware of certain conditions outlined in the loan agreement that could alter this arrangement.

For example, CMBS loan agreements often include clauses that the loan shifts to full recourse if the borrower is found guilty of fraud or misrepresenting their financial condition when applying. Intentional property damage by the borrower also triggers full recourse conditions.

 3. High leverage, low interest 

These loans also allow high leverage (up to 75%for most types of properties and sometimes even 80%). CMBS loan rates are highly competitive, often outperforming bank loan rates for similar borrowers.

4. Assumable 

The assumability of CMBS loans further eases the process for borrowers looking to exit the property before the loan term ends (typically for a nominal fee).

This allows the borrower to transfer the loan to a new buyer if they sell the commercial property. The new owner will adhere to the original loan's terms and conditions. 

5. Cash-out refinancing 

Lastly, CMBS loans support cash-out refinancing, an excellent option for businesses looking to draw equity from their commercial properties for renovations or to fund business expansion. For example:

Cash-out refinancing allows you to actively finance improvements or renovations to a commercial property. These upgrades often increase the property's market value and boost your leverage for future CMBS loan refinancing.

Instead of choosing a traditional business loan or a commercial line of credit, you can use CMBS cash-out refinancing to meet your business's operational needs cost-effectively.

You can also use CMBS cash-out refinancing to grow your real estate portfolio or open a new business location. The CMBS loans can help you pay for new property investment.

CMBS loans: Risks  

CMBS loans come with their own set of risks that potential borrowers should be aware of. 

1. Early exit fees 

CMBS loans often have prepayment penalties if you pay them off early. This can limit your flexibility if you want to sell the property or refinance at a lower interest rate.

Some loans allow a less expensive option called "yield maintenance," where you pay a fee to get out of the loan. However, others require a more complex and costly process called "defeasance." This involves purchasing government bonds to replace the income stream the loan generated for investors.

2. Restricted financing 

CMBS loans often restrict your ability to get additional financing on the property. This can limit your options if you need extra capital for repairs, renovations, or other unforeseen circumstances.

3. Mandatory reserves 

Borrowers are typically required to set aside money in reserve accounts. These funds cover expenses like property taxes, insurance, and capital expenditures. This can limit access to some of your initial investment and requires ongoing financial planning.

Overall, CMBS loans offer potential benefits like lower interest rates. Still, they come with some limitations on flexibility and require careful planning to manage the exit strategy and ongoing financial obligations.

Know More about What Benefits and Drawbacks do CMBS Loans Offers?

CMBS loans: Outlook for 2024

Non-agency CMBS issuance saw a 44% decline in2023, dropping to $39.33 billion from the previous year — a sharp fall from the cyclical peak of $110.56 billion in 2021. 

The forecast for 2024 is more optimistic, with projections of a recovery in non-agency volume to nearly $55 billion, indicating improved liquidity for a market that has been in dire need for several quarters.

The Federal Reserve's intention to reduce borrowing costs in 2024 is promising news for the industry, providing some relief.

However, even with potential rate reductions, borrowing costs are expected to remain significantly higher than those at origination in recent years. Past trends suggest that resolving loan maturities and delinquencies will require time. 


Apply for CMBS loans.  

Capital Investors Direct is a trusted investment advisory firm specializing in commercial real estate. Our team of experts is dedicated to assisting clients like you in securing CMBS loans so they can realize their business ambitions.

In addition to CMBS loans, we offer a broad spectrum of CRE funding sources, including hard money, bridge loans, and stated income loans. Our Commercial real-estate financing specialists can provide personalized advice to identify your project's most appropriate financing solution.

We pride ourselves on offering customized commercial loan options that are often superior to what traditional banks can provide.

Our clients across the country benefit from rapid closing times, competitive interest rates starting at 5%, a streamlined application process, bespoke loan structures, and financing solutions for CRE projects of varying scales.

Start the CMBS loan application process with Capital Investors Direct for access to comprehensive support — from understanding requirements and assessing risks to identifying the most suitable financing options for your commercial real estate endeavors.


Use this form to start.