Commercial mortgage-backed security loans, or CMBS loans, are fairly new in the financial world, having only gained popularity in the 1990’s. They are an interesting option for business owners looking to avoid personal responsibility and finance with low, long-term fixed rates.
Avoid Personal Responsibility
The CMBS process begins the same way as a standard mortgage. A person or company looks into taking out a loan to buy a property, however; this financial option is available only for income-producing properties. The principal and interest are paid back by the borrower over several years as with a standard mortgage. The difference is that with CMBS, the bank bundles the loan up with lots of similar commercial mortgages and sells them all to an investment bank in the form of a bond. The debt has been combined with lots of mortgages, so it is unlikely that the debt will be called as long as the investor is getting payments from the other parties.
A borrower is not required to personally guarantee payment for a CMBS loan. It is important to note that because the arrangement is non-recourse, the underwriting is strict with the property. Properties must be of a higher quality than required for a standard mortgage since the property cash flow is the only means of repayment. Also, penalties for getting out of the loan early are often steep because the financing parties are counting on the incoming cash flow. Consequently, the CMBS route allows a business owner with a qualifying property to avoid personal responsibility in financing the purchase of commercial real estate.
Take Advantage of Lower Rates
Another advantage of CMBS loans is that they generally have low, fixed-interest rates. The lower interest rates are a trade-off for less flexibility. It is difficult to alter or get out of these agreements. The mortgage is handled by parties who are just collecting payments rather than a bank where negotiations are possible. It is not as easy to refinance or modify in order to get better terms or take advantage of a market drop in interest rates. If a business owner is able to accept the limited flexibility of this arrangement, they can take advantage of the low, fixed rates and amortization schedules up to 30 years. These are great advantages for borrowers with a long-term hold strategy.
Mortgage-backed security loans offer some great advantages for owning an income-producing property. They are usually non-recourse to the borrowing party, allowing the business owner to minimize personal exposure. In addition, they are assumable which can add to the property’s value if it is put back on the market. Another advantage is that the principal payment requirements are usually lower for these mortgages and that can free up capital for business owners. CMBS loans offer business owners a unique opportunity to get great mortgage rates and limit personal financial risk when owning commercial property.