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 banks 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.

The advantages of a conduit loan include:

• Asset-focused underwriting, so lenders are not as strict with borrower credit requirements
• 10-year fixed-rate terms
• Non-recourse loans
• Maximum Loan-to-Value (LTV) of 75%
• Option for defeasance or yield maintenance
• Fully assumable loans
• Leverage up to 75%
• Rates as low as 4.30%

The main disadvantage of a conduit loan is that the borrower may not get a great servicing experience. This is because, in general, CMBS lenders don’t service these loans themselves; instead, they hire this out to a third-party servicer, who may not have the borrower’s best interests in mind. Plus, the fact that these loans are pooled, securitized, and sold on the secondary market means that most borrowers will be required to conduct either yield maintenance or defeasance in order to repay their loan. In addition, because these loans are securitized, borrowers who have trouble repaying their loans are unlikely to get any form of forbearance or foreclosure/default prevention assistance. Instead, if the borrower cannot make their monthly payments, they will likely default on the loan relatively quickly.

Source: The Pros and Cons of CMBS Loans: A Guide

CMBS loans or conduit loans are available for income-producing properties such as multifamily properties, self-storage facilities, hotels, industrial buildings, retail properties, and office buildings. To be eligible for a conduit loan, borrowers must have a loan request of at least $2 million and be seeking 75% or less leverage. Additionally, borrowers may have a lower net worth or be looking to finance mixed-use properties. CMBS loans are also a great option for investors with credit or legal issues since lenders are more interested in the financial stability of the asset itself.

For more information, please see the following sources:

• CMBS & Conduit Loans For Commercial Real Estate Financing
• What is Conduit Financing?
• The advantages of non-recourse financing
• Understanding LTV
• What is defeasance?
• What is yield maintenance?

The typical interest rates for a conduit loan are based on the swap rate plus a margin, or spread, designed to compensate the lender/investors for their risk. The swap rate varies based on market factors, while the spread is determined by both market factors and the risk of the individual loan. CMBS loans are typically fixed-rate, though floating-rate CMBS financing does exist.