What are the cons of CMBS to a borrower?
Why would a borrower decide on a CMBS loan vs a conventional senior mortgage?
Im sorry if this is a stupid question but I’ve been reading up on it and other than basically the loan being sold off to a pool of investors..what’s the difference?
No dedicated loan officer who you can pick up the phone and call, the possibility of having to deal with a special servicer if anything goes wrong (and a special is literally going to be someone making $13 an hour in a suburban office park in Kansas) and difficulty as it relates to loan workouts due to the previous two points are the main drawback. Defeasance is a particularly pain in the ass way of maintaining yield and is fairly standard (though not across the board) for CMBS. There is always some form of yield maintenance though and it leaves you not very nimble as it relates to taking advantage of capital markets changes (though less of an issue when rates are as low as they are these days....).
Lmao i'm an Analyst at a Special Servicer in a secondary market and I made 95k this year...
Are you the guy who picks up the phone when a borrower is crapping their pants? The people I'm talking about will likely not ever be on a board like WSO.
CMBS loans are large amount of downsides, but they are great products for the correct asset. If you have an extremely steady eddy asset and you plan to hold the deal for the entire loan term, you can get awesome pricing and terms. Otherwise, it is usually better to go with a relationship banker lending on balance sheet so that when things go wrong, you have someone to communicate with who is incentivized to work with you.
The biggest risk a borrower has with a CMBS lender is that your spread can be re-traded at closing. Yes CMBS servicers suck, its a process to get leases approved, there are no relationship people to work with if you want to do make significant changes to the collateral, prepayment is next to impossible in an era of lowering interest rates. But all that stuff is just known headaches going into CMBS. By far the most significant con is not having a fixed spread before closing.
I'm going to go ahead and say that being re-traded is part of the CMBS game as well. No one is surprised by this. These days there are some specialty shops where the origination team is the team buying the B-Piece (Argentic or 3650 come to mind) which should theoretically cut down on the re-trade risk, but even then, no one whos been around the block is surprised when x,y,z all of a sudden become a factor and your spread blows out 20 bps.
To be honest, if you're smart, you're less focused on who provides the tightest spread when you're out getting cmbs quotes and more focused on whos asking the least questions about structuring/sweep related items and is all over you. Whoever comes in hot and heavy the quickest is usually going to give you the best execution, because the spread is always going to bounce around.
I don't fully agree with the conclusion. Sometimes larger CMBS shops have to fill up their own pools and sometimes take a small loss on certain deals if they are the perfect fit and mean that they can close on the entire pool. Even if the CMBX blows out, they should still be cheaper than shops not trying to close out their pools. In a typical environment, you can lock in the rate but not the spread (unless you purchase a hedge for the rate risk which is typically not worth the effort). Given Covid and the resulting volatility, CMBS issuers have been having a struggle honoring their initial quoted spreads. That being said, as a borrower, you can negotiate against CMBS issuers if spreads move in a beneficial direction.
8.7.1
8.7.1I would also note that from a customer service perspective, getting a loan from one of those Bbuyers would help get someone on the phone with you should something go wrong. Especially with 3650 REIT - the better borrower experience is one of their pitches
Well obviously its "part of the game" and a risk you know about going into it, but otherwise I'm not sure how you want me to answer OP's question. You dont get spread retrades from any other type of lender.
I'm not sure what you're getting at.
Lots of rules with CMBS loans. Want to change property managers? You’re gonna need approval for that and pay fees. Want to do CapEx in the parking lot? You’re gonna need approval for that and pay fees. Want to paint the outside of your retail center a different color? You guessed it...you’re gonna need approval for that and pay fees. Did your anchor tenant have a credit downgrade or hasn’t given renewal notice within typically 12 months prior to lease expiration? Hahaha, your cash flow is now trapped in a lockbox....which if you want to cure the sweep and get it released....you guessed it...you’re going to need approval for that and pay fees. See where I’m going with this?
CMBS offers only 1 positive aspect: no personal recourse for Borrowers that comply with Special Servicers and their Loan Documents to a T.
A lot of good detailed information already. But to add on, I generally think if CMBS as very rigid.
The loan must fit the pool requirements (long term and fixed rate). Not a lot of flexibility to change loan doc terms if needed, since the people who created the loan have sold it. Everything is very standard, which usually means low pricing.
If you want flexibility, you would want to go with a different lender.
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