Lock it In

By Andrew Hanzl

Are you looking for a long-term fixed rate mortgage that is non-recourse, high leverage, has an ultra-low interest rate, and potentially a significant interest-only period?  I know what you are thinking yes, yes, yes, and yes please. Well you’re in luck because at Metropolitan Capital Advisors we have been involved in the placement, structuring, and closing of these Commercial Mortgage Backed Securities (“CMBS”) loans over the course of our history and heavily involved over the past few years.

When assessing whether your property would be a good fit for a CMBS loan there are two main items to consider. The first consideration is whether the property is stabilized with a track record of profitability. Since CMBS loans are pooled to create mortgage bonds that offer the bond buyers a current interest payment, there must be ample current net operating income to be eligible. This requirement eliminates all construction deals as well as existing properties with little to no cash flow from consideration. If you have ample cash flow, CMBS lenders are going to play ball and often willing to take on deals passed over by banks. For example, CMBS lenders are willing to engage borrowers that have poor credit, previous bankruptcies, or that are lacking the minimum net worth and liquidity requirements typical of most banks. Unlike banks, CMBS lenders are more focused on assessing the quality of the real estate rather than the creditworthiness of the borrower.  However, CMBS lenders are not pushovers they will dive deep into the real estate prior to quoting a deal. You should be prepared to make available a laundry list of due diligence items such as operating statements, historical occupancy charts, resumes of the sponsorship, tenant sales, co-tenancy clauses, sales comps, leases comps, leases, etc. when exploring the CMBS landscape.

If you can check the first box of having a stabilized property, the second consideration before seeking a CMBS loan is determining how long do you plan to hold the Property. If you are unsure or want the flexibility to sell at a moment’s notice, a CMBS loan probably isn’t the right path for you. All CMBS loans come with steep pre-payment penalties, which make selling or refinancing prior to loan maturity expensive if not economically impractical. CMBS loans are ideal when the business plan is to hold for 5, 7, or 10 years.

If you have a stabilized deal with a long-term hold in mind you can enjoy the benefits of the most aggressive permanent loans in the debt market. CMBS loans offer the lowest interest rates, most aggressive leverage, no personal liability, and the longest amortization of any loan product. Thanks to record low treasuries we are currently seeing CMBS loans quoted between 3.8% to 4.2%, which is much lower than the 5.0% to 6.0% rate banks are offering on stabilized deals. CMBS loans also offer significant interest-only periods, as well as a 30-year amortization period. From a leverage perspective, CMBS lenders will routinely hit 75% loan-to-cost on multi-family, office, industrial, and self-storage and 70% loan-to-cost on retail, hotels, and senior living. Finally, CMBS loans are always non-recourse, except for what is colloquially termed the “bad-boy carve-outs.” Which means that the borrower is not personally liable for the repayment of the loan and that the collateralized property and its cash flows would be the sole source of repayment of the debt in the event of a default or foreclosure, unless they violate a bad boy carve out (i.e. misrepresentation, fraud, theft, or voluntary destruction of the property).

We recently helped a client refinance a property with an aggressively shopped CMBS loan on a retail power center that closed at a 4.0% interest rate, 10-year term, full-term interest-only at 65% LTV, and could help you receive similar terms on your transaction. If you would like more information about CMBS loans or would like assistance securing a CMBS loan, please contact Andrew Hanzl at ahanzl@metcapital.com.

The Author, Andrew Hanzl, is a Senior Analyst in the Dallas Office of Metropolitan Capital Advisors.