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A commercial mortgage backed securities loan is a lending option that could be beneficial to business owners interested in borrowing $2 million or more to finance commercial real estate. While closing costs on CMBS loans may be close to double the closing costs of traditional CRE loans, the money saved in the long run make these conduit loans quite appealing.

The main draw of this type of conduit loan is the low interest rate it typically offers borrowers. CRE investors lock in a significantly lower interest rate that is fixed over the course of the loan, rather than resetting after about five years, which is a common occurrence with other lending options. This practice results in much lower overall financing costs, sometimes as much as a ten percent difference. CMBS loans allow borrowers to reap the benefit of a competitive investment marketplace by securing comparably low interest rates that don’t change regardless of what the market does in subsequent years.

Another benefit of this loan type is that it is usually a non-recourse debt. The borrower puts up collateral, which is typically the property being financed by the loan, and that secures the loan amount. If the borrower then defaults on the loan, the only thing the creditor can come after is the collateral. Even if the liquidation of the property does not yield sufficient capital to cover the rest of the loan, it is still all the creditor is entitled to demand. Borrowers do not have to risk their personal assets when they obtain CMBS loans. Even if they default on their loan, the most they can lose is the collateral itself.

The exception to the non-recourse rule is any behavior that the borrower engages in that damages the property as an asset, thus lowering its overall value. For example, if the borrower commits some type of fraud or misappropriation of capital, action may be taken against him or her. Physical damage through either intentional mistreatment or gross neglect also falls under this category of “bad-boy” behaviors. When borrowers make these choices, they are at risk of being strapped with full recourse liability.

Another benefit to borrowers is the ease of sale. If they want to sell the property, an agreement can often be made with the purchaser and the lender to transfer the property title and loans directly over to the new owner. Transfer of property ownership is less complicated with these conduit loans than with other types of financing.

While CMBS loans may offer less flexibility or opportunity to negotiate terms, their benefits can outweigh the drawbacks for many borrowers. The low interest rates of these non-recourse loans can be just what CRE investors are looking for.