Negotiating CMBS Loans
We’ve all heard horror stories about origination and servicing issues on CMBS (commercial mortgage backed securities) loans. The truth is, if negotiated properly, CMBS loans can be structured to avoid issues and provide tangible benefits to borrowers.
CMBS loans are sophisticated capital market transactions where investment banks package loans to form a pool for securitization. CMBS lenders are required to structure each loan to address its credit risks. This structuring includes items like loan term, interest-only payments, holdbacks, trigger events, cash management, lockbox requirements, etc. Typical risks that the lender can structure around include: leverage, lease rollover, deferred maintenance, future tenant improvements and leasing commissions.
The key to a successful CMBS closing is negotiating the structure early in the process and focusing on the primary deal terms. Typical deal points include the following:
1. Rate (Spread) – CMBS loans are priced at a spread above a corresponding treasury SWAP rate. The spread is negotiable. It is important to have your mortgage banker bid the loan out to multiple CMBS sources to ensure the most competitive terms.
2. Holdbacks – How much, if any, funds are held back is generally a function of potential future capital requirements. These figures can be negotiated and structured in a way to meet both the needs of the lender and preferences of the investor.
3. Trigger Events – These can be the most consequential since they are predetermined events which require rental funds to be “swept” into a lender controlled account to be used for property related expenses. Trigger events generally focus on major tenant losses and sustained drops in net income available for debt service. Additionally, triggers tied to the credit rating of a tenant should be paid close attention to.
4. Interest-Only – Full and partial term interest-only is readily available for CMBS loans. In the third quarter of this year 70% of all securitized loans featured full or partial term interest only.
While the above deal terms are some of the negotiable items, there are other terms like reporting requirements and sponsor covenants that are negotiable as well.
Effective negotiation requires understanding the credit risks on each loan and working with the lender to structure around those risks. Knowledge of the major CMBS players, their reputation in the marketplace, and their annual loan volume can help identify which lenders are more likely to deliver the most competitive terms.
Increased loan dollars, aggressive interest rates, interest-only payments and non-recourse provisions are some of the benefits of CMBS loans. An experienced mortgage banker can help navigate the ever-changing landscape of CMBS lending to source and structure the best possible deal.