Investing with Conduit Loans

Commercial real estate can be a lucrative business opportunity, and those who purchase property for profit typically finance their endeavors through traditional bank loans. But there are other viable options that may not be as well known to investors, such as CMBS conduit loans. If you’re just starting out in commercial real estate, or are otherwise looking for alternative forms of financing, consider these types of loans for your list of options.

What is a CMBS Loan?

Commercial mortgage backed security loans, also referred to simply as conduit loans, differ greatly from traditional loans. Your lender gets paid consistently over a set period of time with a traditional loan. Conduit loans, however, are a little more complex in nature. These loans are packaged together with other similar loans, and the resulting package is then converted into bonds to be sold to bond investors. Because conduit loans are inevitably pooled with other loans, you will not pay your original lender like with a traditional loan. Instead, a CMBS servicer known as the master servicer will continue to help you with your loan payments. You will also be expected to use your property of interest as collateral should any issues with loan payments arise.

What are the Advantages?

For those whose main concern is the interest rate, conduit loans might be exceptionally appealing. Conduit loans typically have much lower interest rates than those offered by a bank, and choosing a traditional loan to finance your commercial real estate may also run the risk of having to deal with fluctuating interest rates. Conduit loans offer a fixed rate, making it easy for you to plan your finances accordingly. If getting a stable, affordable interest rate is your main goal, consider a conduit loan.

What are the Disadvantages?

There’s really only one major concern with CMBS conduit loans, and that’s lack of flexibility. As a borrower, you’ll have little sway during negotiation of the terms, and once all appropriate documents are signed, you are locked into that agreement. Adjusting the terms after that may be difficult. Additionally, since these loans eventually become part of a trust, many borrowers do not get the option of prepayment. If you require a little more flexibility in your loan terms, a traditional loan might be a better option. Otherwise, try financing your commercial real estate with conduit loans and enjoy the stability and savings these loans can offer you.

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