A commercial mortgage-backed security (CMBS) is a type of debt security that provides investors with a high level of interest rates. These types of securities are typically structured as a combination of a mezzanine and conduit tranche, as well as a defeasance and equity tranche. As a result, CMBS often attract a wide variety of investors. However, the terms of a CMBS are highly complex, so it’s important to understand them thoroughly before committing to a particular deal.
Mezzanine tranche
A Commercial Mortgage-Backed Security (CMBS) is a type of collateralized debt obligation. It is a bundle of loans that are sold to investors as bonds. It is a good way to get additional capital for a commercial real estate project without having to shell out millions of dollars. However, like any other product, CMBS has its share of pitfalls.
The most important thing to note is that a CMBS is a non-recourse loan and therefore prohibits second mortgages. Also, it is hard to find a lender that will finance projects at very high LTV ratios. In fact, many borrowers prefer to limit equity investments to 10-15% of the total value of the property.
The CMBS has two main parts: a senior and a junior. The senior part is the most prestigious and represents a substantial portion of the capital structure. Typically, the senior part carries an outstanding balance of $200 million. This is followed by the more modest junior tranche.
Conduit tranche
Commercial mortgage-backed security (CMBS) loans are fixed-income investments that are backed by commercial real estate loans. These securities are a good source of capital for investors looking for stable and long-term returns. CMBSs are also a great choice for lenders.
Conduit CMBS loans are priced on a treasury rate plus spread. The interest rate is not fixed until the loan has closed. However, there are certain factors that can affect the spread.
These include the property quality, the quality of the tenant, and the quality of the cash flow. If the borrower is unable to make the payments on time, they can default on the loan.
In addition, the conduit loan can be structured with prepayment penalties. This is designed to discourage early loan payments. Often, the prepayment penalty is tied to the Treasury yield. Depending on the lender, it can range from one dollar to several dollars per month.
Equity tranche
A commercial mortgage-backed security is a type of mortgage-backed security that is backed by commercial real estate loans. The loans are bundled into a pool and sold as bonds to investors. These loans are typically commercial mortgages, which are loans for office buildings, hotels, factories, and apartment buildings.
Commercial mortgages are typically ten-year fixed-rate loans. They are also usually backed by significant prepayment penalties, so they carry a high prepayment risk.
The senior tranche of a CMBS is the safest. It’s a first lien on the assets, and it is the one that has the highest credit rating.
The junior tranche of a CMBS is a bit less safe. It’s backed by longer-term loans. But it also has the higher yields and higher credit ratings.
The middle is the mezzanine. This is a bit more risky but it has the highest yields.
The bottom is the unrated. The lowest-rated loan in the pool will be absorbed into the lowest-rated tranche.
Defeasance
Defeasance in a commercial mortgage-backed security can benefit borrowers by reducing interest rates and eliminating prepayment penalties. The concept originated in the municipal bond market, and was adapted to the commercial real estate market in the 1990s.
The process for defeasance involves several parties, including the original borrower, the lender, and the new entity that assumes the loan. It can also involve attorneys, rating agencies, and consultants.
The process of defeasance is usually outlined in the loan agreement. However, the process can vary by lender.
Defeasance allows the borrower to release the lien on the real property and replace it with a portfolio of government securities. This portfolio is expected to produce cash flow to repay the loan. Once the portfolio is in place, the original borrower will be able to make regular debt payments.
Defeasance is a way for borrowers to lock in lower interest rates by refinancing. However, it is not a perfect solution for everyone.
