An Introduction to CMBS Loans

While they might be unfamiliar to many smaller entrepreneurs and investors, commercial mortgage-backed security loans have been a staple of the commercial finance industry for over twenty years now. They are designed to provide borrowers with a clear path to interest rate reductions, and they also provide a substantial investment opportunity to a wide market of investors at various levels. CMBS loans even enjoyed a brief popularity in the residential mortgage industry, and recent refinements to the investment structure of these loans has helped to make them even more attractive as stable investment vehicles.

The structure of these loans and their function as investments is simple. Individual lenders take out loans that usually have some preferential interest rates in exchange for an agreement that limits their ability to prepay without penalty. This helps to ensure the lifespan of the investment for the investor, providing more assurance of the full return projection working out. The loans are then put together into large-scale funds that individual investors can buy shares in. This is more attractive to both the borrower and the lender-investors than a direct relationship would be, and there are a few reasons for that.

CMBS loans work better than direct lending investment arrangements for the investor because the larger fund size and the ability to buy shares of the fund without buying specific individual loan debts work together to dilute the risk involved with debt investing. When you have 10,000 loans bundled into a super fund, a substantial number of them need to fail before the fund stops paying out dividends. When funds are smaller, or when investors lend money directly to borrowers, there is substantially more risk. As a result, the loans have to be made at much higher interest rates. This, in turn, usually leads to borrowers demanding more loan features, which increase the variability of interest projections.

When you look at CMBS loans as an investment vehicle, it is important to realize that the fund’s shares are not sold blindly. Instead, they are divided into tranches of a certain credit rating and risk level. This allows investors to check out the relative riskiness of individual specific investment decisions in a more precise way, making it easier to optimize your portfolio for various goals.

If you are interested in exploring these loans as a borrower, you can find then with various repayment structures, so you should be able to find a lending service who can flex with your needs. The important thing to remember is that your choice to work with this particular form of debt is likely to save you substantially on interest over the life of the loan.

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