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Conduit loans have
been around since the late 1990s
and are somewhat unfamiliar to most commercial real estate
investors.
What is a conduit loan? A conduit
loan – also known as
a CMBS loan (Commercial Mortgage Backed Security) – is a type of
commercial mortgage that is packaged into a pool with other similar
type commercial loans and securitized and sold in the secondary
market to institutional investors. This process is known as
securitization. The loans in the pool are held in trust and serve as
collateral for the mortgage backed security.
The secondary market for these type of securities is extremely
large and provides a great deal of liquidity to the commercial
mortgage market. The mortgage backed security is typically broken up
into to tranches (a security that is broken up into different parts
but has various levels of risk, return and maturities). Lower risk
investors such as pension funds take the least amount of risk while
higher risk investors such as hedge funds will take the higher risk.
A conduit loan is structured as a permanent,
fixed-rate commercial real
estate loan on a non-recourse basis
according to specific, but standardized underwriting and documentation
requirements. These standards facilitate the loan’s
ultimate securitization.
Conduit loans
typically
provide lower fixed-rates when compared with
traditionally
commercial real
estate loans.
They are
priced based on the
comparable “on the
run” treasury rate
plus a spread.
Property quality
grade, tenant
quality, tenant bond
grade, property
location,
management,
seasoning, and property
cash-flow (DSCR) all
affect the interest rate
spread, either
positively or
negatively.
Prepayment on a
conduit loan is much
different than with
traditional
commercial loans.
Prepayment on a
conduit loan is
typically defeasance.
Defeasance allows
the borrower to
purchase substitute
collateral for the
conduit loan.
With conduit
loan defeasance, single
or multiple US
Treasury securities
with varying
maturities must be
purchased in order
to complete the
defeasance. There is
no minimum
prepayment under
conduit loan defeasance, and in
some circumstances,
the borrower could
actually receive a
payment when the
conduit loan is defeased.
Other forms of
prepayment penalties
include yield maintenance.
Yield maintenance is
based on a minimum
yield to the
investor
that
purchased the
conduit loan
(or the Fannie Mae
security backed by
the loan) and is
basically the
present value of the
difference between
the conduit loan?s interest
rate and current
rates with a similar
maturity date as the
original conduit loan. Historically,
Yield Maintenance
terms have been 6
months less than the
actual conduit loan term.
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