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CMBS Makes Sense Today

Most of the time when I suggest CMBS as a financing option to a client I get a response like, “I don’t want to deal with CMBS.” CMBS has a reputation for being inflexible, difficult and expensive to close. However, in today’s market CMBS may be the best option for a commercial property owner.

If you need a term loan on a cashflowing commercial property these are the general options*:

• Banks

• Life Insurance Companies

• Agencies (Multifamily)

• CMBS

Most banks are shedding CRE exposure from their balance sheets (some even selling performing loans at a discount) so the appetite for new loan originations from banks is very low. Any banks that are still in the market would provide very low leverage and require personal guarantees.

Life Co’s are also very conservative on underwriting, lower leverage and their appetite tends to slow down later in the year as they hit their origination targets.

Agencies are only useful for multifamily properties and have very strict and inflexible underwriting requirements. Any previous sponsor challenges would make them walk.

CMBS appetite is strong all year long, provides the maximum leverage, is flexible on terms and can be more forgiving on sponsor history such as a previous foreclosure. CMBS loans are Non-Recourse, not requiring any personal guarantees from the property owners.

Additionally, a CMBS loan is almost always the path to maximum leverage because they can size a loan to a 1.25 Interest Only (I/O) Debt Service Coverage Ratio (DSCR). Many CMBS loans today are also structured with a rate buy-down costing around 1-2% of the loan amount paid from loan proceeds at closing. This allows for even higher leverage. Here’s an example assuming a property generating $1M in annual NOI:

In my experience the standard objections to CMBS around difficulty and cost is more a function of which CMBS lender you’re working with rather than the overall CMBS market. I’ve closed CMBS loans that have been super fast, had reasonable underwriting costs and the lender really stretched on terms to get the deal done.

We have a long relationship with one of the largest non-bank CMBS lenders in the country. Not being a bank gives them more flexibility and the ability to move fast (they can close a CMBS loan in 30-days). Its parent company is one of the largest asset managers in the world ($1T+ AUM) which means they can also fund preferred equity on top of a CMBS loan, being a one-stop shop for financing needs up and down the capital stack. They have essentially no maximum loan amount for larger loans and also have a small balance CMBS loan program for loans $15M or less with fixed underwriting costs.

If you’re in market for a term loan and haven’t considered CMBS click the button below.

*We didn’t include HUD, SBA and other highly specific loan programs because their scope of applicability is so narrow and SBA loans are relatively small.

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Nathan Whigham
President
CA DRE Broker License: 01793655

EN Capital Contact Info:
www.encapital.com
[email protected]
Direct Line: 310-465-9253