What is a CMBS Loan?

Commercial Mortgage-Backed Securities (CMBS) are bundles of commercial real estate loans that are pooled together, securitized, and sold to investors.  Unlike traditional portfolio loans, CMBS loans are structured to be sold on the secondary market and placed into trusts, which issue bonds to investors. 

When the pool of loans is created, it is divided into tranches based on risk and return.  The investment grade bonds are the highest rated, least risky and will offer lower returns for investors.  The non-investment grade bonds sit below the investment-grade tranche in the CMBS stack and absorb first losses if defaults occur.  As this lower tranche is riskier, investors require a higher yield.

Some of the benefits of CMBS loans are that they are typically non-recourse and offer full assumability.  Additionally, with full term interest-only option available these loans can be underwritten with the interest-only payment to meet debt-service coverage ratio requirements, which means higher proceeds.  Since banks do not hold CMBS loans on their balance sheet and is considered more diversified with risk spread across multiple investors, these loans generally can offer borrowers relatively lower fixed interest rates and higher leverage.

However, something to keep in mind when it comes to CMBS loans is the lack of flexibility.  Investors in CMBS expect to get paid their debt service on time and get their money back at maturity.  For borrowers, this means that exiting a CMBS loan early is more complex and expensive, usually requiring defeasance.