What is a Conduit Loan in commercial real estate?
A conduit loan, also known as a CMBS loan, is a commercial real estate loan which is secured by a mortgage on a commercial property. These loans are structured by conduit lenders, commercial or investment banks.
A conduit loan consists of commercial real estate first mortgage debt, which is pooled together and held in a trust. The commercial loans are single loans of varying property types, loan sizes, and locations. The trust then releases a series of bonds of varying yield, duration, and payment priority. Investors choose which bond they would like to purchase based on their appetite for risk, yield, and duration.
Pooling together single loans makes them more attractive to investors. It also allows investors to enter the commercial mortgage market. This increases the amount of available funding for commercial mortgage loans, and forces mortgage loans to be aggressively priced.