Things To Know

Insurance Company Portfolio vs. CMBS Conduit Loans

When choosing a lender for your commercial mortgage loan, one of the most important decisions to make is whether to go with a lender that holds the mortgage loan in their portfolio (typically a life insurance company or pension fund); or to use what is known as a conduit lender that originates the loan to be bundled with other mortgages and sold as a commercial mortgage-backed security (“CMBS”).

Following are some of the important differences between the two types of loans.

Insurance Company Portfolio Loan

Higher quality and/or low loan-to-value loans (<75% LTV), more flexibility & certainty.

Positives:

  • Early rate-lock (often @ application).
  • Longer terms (some up to 20-25 years fixed-rate).
  • More flexibility (on prepayment, deal structure and events during the term of the loan).
  • 30/360 interest calculation (approx. 7-10 bps less yield to lender vs. actual/360).
  • Typically no escrows required for tenant roll-overs or capital repairs; escrows for real estate taxes & insurance vary from lender to lender.

Negatives:

  • Lower on the risk spectrum -LTV (max. 75% for most deals).
  • Amortization shorter (20-25 yrs.).
  • Building must be “institutional quality”.
  • Some lenders may be out of the market temporarily if investment needs are met for the year or cash inflows are down.

Conduits for Commercial Mortgage-Backed Securities

Provides unlimited supply of capital, but subject to gyrations of the world capital markets. Loan underwriting and documentation must fit rules of Wall Street regarding securitization. After closing of the loan, no business decisions are allowed unless covered by the language in the loan documents.

Positives

  • Higher LTV deals (75%-80%).
  • Not as picky on the asset quality (consistent cash flow is most important).
  • Longer amortizations (30 years normal).
  • Up to 85% LTV with mezzanine piece.

Negatives:

  • Actual/360 interest calculation (adds approximately 7-10 bps in yield to lender vs. 30/360 used by life insurance companies).
  • Approval process not as certain vs. insurance companies -deal can change up until commitment.
  • Defeasance prepayment clause (more expensive to transact compared to yield-maintenance prepayment).
  • Typically requires escrowing of funds for future tenant improvements, leasing commissions and capital repairs, with processing fee for each reimbursement.
  • Ownership structure must be single-purpose entity (SPE) & if over $10.0 mm, “bankruptcy remote”.
  • Little flexibility on servicing issues (lease approvals, borrower transfers, release provisions, etc.) unless pre-negotiated in the loan documents.
  • Lender’s legal fees tend to be higher (10%-20% than life insurance companies).