CMBS Conduit Commercial Loans

Commercial mortgage-backed securities lending, commonly called conduit lending, originates loans specifically to be pooled and sold to bond investors. Because the loan will be securitized, the underwriting is standardized and the property carries the credit: the lender cares about in-place net operating income, debt yield, lease rollover and the quality of the cash flow far more than the sponsor's balance sheet. The result is genuinely non-recourse ten-year fixed-rate money, at leverage a life company will not match, for borrowers who would fail a bank's global cash-flow test.

The discipline comes after closing. Once the loan is securitized it is administered by a master servicer under a pooling agreement, and the loan documents cannot be renegotiated the way a balance-sheet lender's can. Lease approvals, reserve releases and any modification run through the servicer, and prepayment normally requires defeasance — replacing the collateral with government securities — rather than a simple penalty. CMBS is the right answer for a stabilized asset the sponsor intends to hold for the full term, and the wrong answer for one that may be sold, expanded or repositioned in year four.