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Conduit loans
are available for
many different types
of income producing
commercial real
estate properties,
including,
multifamily
properties, self storage facilities,
hotel,
office buildings,
industrial buildings,
warehouse and
retail properties.
Conduit loans are
somewhat unfamiliar
to many investors,
having been around
since the late 1990s.
Additionally, many
small banks don't
offer conduit loans
so investors have
very little exposure
to conduit lending
and the many
advantages these
CMBS loans provide.
Borrowers
seeking higher
leverage and lower
fixed-rates tend to
prefer a conduit
loan compared with
traditional bank
commercial mortgage
loans.
Most conduit loans
are non-recourse, no
personal guarantees,
with exceptions for standard
carveouts, commonly
referred to as bad boy
behaviors.
Within the capital marketplace
there are a number of
conduit
lenders, including, life insurance companies, pension
companies, financial
services firms and
some of the nation's
largest banks and
investment banks.
Conduit lenders
generally hold the
conduit loan only until it can be
securitized, typically less than two years.
In a securitization, there is sale of interests in the
conduit loan
and an assignment of the loan within a few weeks or months
after the closing to an institutional trustee.
The investors who buy interests in the
conduit loan are issued
"pass-through" certificates. Instead of making payments to
the institutional lender, the borrower makes payments to a
commercial mortgage servicer, who sees that the payments are applied as
provided in the conduit mortgage documents, including to fund any
required reserves.
Payments of principal and interest are allocated according
to the relative interests of the certificate holders.
Conduit loans offer attractive interest rates, but there are
other factors to consider when deciding between a CMBS or
traditional commercial real estate loan product, such as,
prepayment penalties, commitment fees, subordinate
financing, and other program options.
One of the
requirements of
obtaining a conduit
loan is the
borrowing entity must be a single purpose, bankruptcy-remote
entity.
This may require either the creation of a new single-purpose
entity or the amendment of the borrowing entity's certificate
of incorporation, articles of organization or certificate of
limited partnership, as well as of the by-laws, to give the
lender and, ultimately, the rating agencies a sufficient
comfort level.
Conduit loan documents are more standardized than
with
typical bank
commercial financing. The borrower has less ability to
negotiate changes. One issue that is important to
borrowers is the ability to obtain insurance proceeds to
rebuild after a casualty.
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