Trending Content - Real Estate Forum
Career Resources
WSO Free Modeling Series - Now Open Through
June 30, 2026
9 Free Financial Modeling Lessons
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
+Bonus: Get 27 financial modeling templates in swipe file
+Bonus: Get 27 financial modeling templates in swipe file
High Finance Applications
Guaranteed
Get at least one offer GUARANTEED
- 1:1 support
- 92% success rate
- 2,000+ mentor network
- Unlimited Live bootcamps
- AI for resume + LinkedIn
- Networking automation tools
- HireVue simulation tool
- Full course library
- Private Slack community
- 20hrs of mocks
- + much more...
Part of it has to do with the prepayment structure. For fixed rate CMBS, they can recuperate loses through Defeasance and they rarely have flexible prepayment structures. Floating Rate CMBS tends to include more prepayment flexibility. The other part is that in reality, CMBS originators earn (or at least try to earn) 2+ points on every transaction. The points are baked into the spread and are effectively amortized into the loan.
Thanks for the reply.
I understand part 1 of your explanation - fixed-rate deals typically have long defeasance / yield maintenance periods where as floaters typically have 12-18 months spread maintenance. I'm not sure I understand the second part - if points of profit are baked into the spread on fixed-rate CMBS deals, why can they not be similarly baked into the spread on floating-rate CMBS deals?
It ties back to the 1st point. One way to think about it is in terms of cost. Let's assume that the cost of producing a loan works out to 2% per deal.
5 Year Fixed: Prepay is Defeasance and open during last 3 months at par. The life of the loan is pretty much guaranteed. So the 2% for example will be baked in at 50 bps per year or so. (sums up to 250 bps but time value of money brings it down).
5 Year Float: Open to prepay after 2 years. Worst case scenario, the loan gets prepayed after 2 years. 2% over 2 years would work out to ~1% PER YEAR. The impact that it would have on pricing is absolutely huge, otherwise the originators don't make nearly as much money. Having a 1 point fee upfront minimizes the early repayment risk that the CMBS shops have (they can base the spread premium based on WAL). It also encourages borrowers to keep their loans for longer since putting down a point every 2 years would add up quick.
Prepayment is basically a call option baked into the debt and is reflected in the pricing, the borrower has the ability to prepay or call back the loan and thus needs to pay a premium for the option to do so, so that's already being paid for in the pricing of the debt.
Right, but doesn't that premium the borrower has to pay exist whether the deal is floating rate or fixed rate? Why is the convention that floating rate CMBS loans have an upfront fee and fixed rate CMBS loans do not?
no since fixed rate cmbs' typically are not prepayable without penalty and thus don't have the call option
Repudiandae odio quas qui velit. Totam nobis esse minima animi.
Expedita sint sint reprehenderit commodi quia aut. Laboriosam accusamus est quis nobis.
Sequi occaecati possimus laudantium autem minima reiciendis. Commodi aut eius temporibus aspernatur.
Aut omnis explicabo in vitae mollitia distinctio animi. Repudiandae quo et quia ratione est. Officiis quasi voluptas quia. Voluptas quas maxime vel maxime quo. Incidunt dolore maxime quam facere quia ea voluptatem. Quam quo hic et distinctio rerum. Eos aperiam rerum quaerat voluptatem earum.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...