Conduit or CMBS are loans made by lending institutions which carry the lowest interest rates and often the longest fixed terms. Lending guidlines for these loans are very inflexible when it comes to underwriting. These loans are made on stabilized properties with the lowest amount risk. Conduit loans are packaged, converted to bonds and sold on Wall Street. These loans are made to investors who intend to hold onto their property for the long haul, because of this strategy these loans are typically priced very aggressively in terms of interest rate. On the downside conduit lenders require borrowers to agree to yield maintenance or defeasance clauses, this requires borrowers to substitute the collateral with government issued securities in order to provide comparable rates of return. Lock out  clauses of 5-7 yrs. with Pre-payment penalties are also very common in CMBS loans, these clauses prevent prepayment of the mortgage for the lock-out period in which fees are incurred for paying the loan off early either thru refinancing or selling the property. Borrrowers should avoid these types of loans if they will need access to their equity for other purchases or flexibilty in underwriting non-conforming "out of the box" transactions.

 

On the other hand Portfolio lenders pride themselves on providing short term creative financing solutions. A portfolio loan is one made by a lending institution who originates the loan and places it in their own portfolio or balance sheet for the entire life of the loan. Portfolio lenders are generally more flexible in their lending criteria and offer short term interest only programs, with low to no prepayment penalty. These loans are great for the investor who can convey his vision of increasing the properties value in a relatively short amount of time, say 1- 3 yrs. These loans are ideal for the flipper who will hold a property long enough to stabilize rents, make improvements and then sell at a huge profit. Interest rates are higher and upfront fees can be excessive, but for a project that needs fast money these loans can be funded and closed in 5 - 14 days.

 

Understanding these two loan categories will prepare you for dealing with both the "bankable" conventional commercial loan request and for the "out of the box" loan request that has a lot of moving parts and needs to close quickly. The experienced broker knows its not always rate that determines the best loan.

 

Example - Mr. Jones sees an opportunity to purchase a large apartment complex. The property is only 75% leased and needs some improvements to bring in new tenants and upgrade the property for a quick resell. Mr. Jones has let his contract all but expire and needs to close quickly.

What is the best loan for Mr. Jones? In this hypothetical example Mr. Jones would probably benefit from a Portfolio loan, Mr. Jones needs to be able close this loan or loose his earnest money deposit, he also needs a lender who will see the upside potential in this property even though the property is under leased and in need of updates. Had his property been 90% leased in excellent condition, with debt service coverage ratios of 1.20X, and 20% down payment cash, in other words a clean low risk investment, bank conduits would undoubtedly compete to offer the lowest interest rates possible.

 

As your commercial mortgage consultant we will weigh all the options available before placing your loan ensuring the right loan regardless of your  investment strategy.