Understanding CMBS Loans

If you’re in need of commercial real estate financing, it could be worth your time to look into commercial mortgage-backed security loans, more commonly known as CMBS loans. Such loans are an ideal choice for hotels, office buildings, apartment buildings, malls and factories. One of the best things about these loans is that they’re a blend of both a real estate investment and a fixed-income investment. Learn the basics of this particular financing option to see if it’s a solid fit for you and your business needs and goals.


How CMBS Financing Works


If you’re familiar with investing in exchange-traded funds, then you already have a loose idea of how CMBS loans work. The security loans are made from a group of bank loans that have been gathered together and sold in the form of a series of bonds. The bonds are collected into those that are highly rated with the lowest risk, and those with the lowest rate and highest risk.


Are These Loans a Good Fit for You?


While it’s great to have a variety of options to choose from when it comes to commercial real estate investing, you have to know which financing options are the best fit for you and your background. In regards to CMBS loans, it’s best if you’re familiar with the real estate market as well as fixed-income investments. Because of the investment aspect of the loan, interested individuals need to create a risk profile with information regarding the real estate’s geographic location, borrower dynamics, overall quality of the physical structure and the structure of the loan itself. Investors should also ensure they’re fully aware of the loan’s bond structure.


Additionally, you have to bear in mind that these particular securities are often an ideal fit for ETF managers, wealthy investors and investment entities. This isn’t to say that you’re automatically disqualified from investing if you don’t fit any of the mentioned titles, just that you should know what you’re getting yourself into.


The Good


One benefit of these loans is that they often provide substantial returns when compared to corporate and government bonds. They also come with a reduced prepayment risk when compared to residential mortgage-backed securities.


The Not-So-Good


In regards to downsides to be aware of when it comes to CMBS financing, there is a risk of defaulting and investors experiencing a loss if underlying borrowers don’t make their interest or principal payments. The overall health of the real estate market can also spell trouble for these loans, which is something that was experienced in the Great Recession of 2007 and 2009.


Start exploring your options for a CMBS loan. Don’t hesitate to consult with an expert if you have any questions.

SHARE IT: LinkedIn