Benefit of CMBS vs Agency
If you are looking to invest in commercial real estate, you have probably come across two popular options – CMBS and Agency loans. Both are widely used in the commercial real estate industry, but what sets them apart? Let’s take a closer look at the benefits of CMBS and Agency loans, and how they differ from each other.
What is CMBS?
CMBS (Commercial Mortgage-Backed Securities) is a type of loan that is pooled together with other commercial mortgages, and then sold as a bond on the secondary market. This means that the lender, typically a commercial bank or a real estate investment trust (REIT), will package a large number of individual commercial real estate loans into a pool and then divide it into debt and equity tranches. The debt tranches are then sold to investors as a type of bond, while the remaining equity tranches are kept by the lender. This process helps to spread the risk for the individual loans among a larger group of investors.
What is an Agency loan?
An Agency loan is a loan provided by government-sponsored entities (GSEs) such as Fannie Mae, Freddie Mac, and Ginnie Mae. These loans are usually secured against multifamily properties and have strict guidelines that must be followed by the borrowers in order to qualify. These loans are ultimately funded by the government and carry a government guarantee, which makes them less risky for investors.
Benefits of CMBS
1. Higher Loan Amounts
Compared to Agency loans, CMBS loans typically offer higher loan amounts. For example, Fannie Mae and Freddie Mac limit their loan amounts to $6-8 million, while CMBS loans generally start at $10 million and can go up to hundreds of millions of dollars. This makes CMBS loans a more suitable option for larger commercial properties.
2. Non-Recourse Financing
CMBS loans are non-recourse loans, which means that the lender cannot seek recourse against the borrower’s personal assets in case of default. This feature is attractive to borrowers who want to shield their personal assets and limit their personal liability in case of default.
3. Flexible Terms
CMBS loans offer a wide range of terms and options, making them a more customizable option for borrowers. Borrowers can choose from a variety of loan structures, such as fixed or floating rates, interest-only periods, and balloon payments, to suit their specific needs.
4. Lower Interest Rates
CMBS loans often come with lower interest rates compared to traditional bank loans. This is because CMBS loans are funded by large groups of investors, which drives down the cost of capital for the lender, resulting in lower interest rates for the borrower.
5. Diversification
Investing in CMBS loans allows investors to diversify their portfolios by spreading their risk across various loans, properties, and geographic locations. This mitigates the risk of losing a large sum of money in case of default on one particular loan or property.
Benefits of Agency Loans
1. Lower LTV and DSCR Requirements
Agency loans usually have lower loan-to-value (LTV) and debt service coverage ratio (DSCR) requirements compared to CMBS loans. This makes them a more viable option for properties with lower occupancy rates or those that do not generate enough cash flow to meet the stricter requirements of CMBS loans.
2. Favorable Prepayment Penalties
Agency loans often have more favorable prepayment penalties compared to CMBS loans. In most cases, the prepayment penalties decrease over time, making it easier for borrowers to refinance their loans if needed.
3. Easier Assumability
Assuming an existing loan can be a great benefit for borrowers, as it allows them to avoid paying costly prepayment penalties or refinancing fees. Agency loans are typically easier to assume compared to CMBS loans, as they do not require borrower approval or a significant assumption fee.
4. Lower Closing Costs
Agency loans have lower closing costs compared to CMBS loans since they have more streamlined underwriting processes and standardized loan documents. This can result in savings of thousands of dollars for borrowers.
5. Flexible Prepayment Options
Most Agency loans offer a variety of prepayment options, such as yield maintenance, declining prepayment premiums, or no prepayment penalties at all. This allows borrowers to choose the prepayment option that best fits their needs and financial goals.
FAQs about CMBS and Agency Loans
Q: Which loan is more suitable for a first-time investor?
A: Agency loans are generally a better option for first-time investors, as they have more favorable terms and lower requirements compared to CMBS loans.
Q: Do CMBS loans have a maturity date?
A: Yes, CMBS loans usually have a fixed maturity date, after which they must be paid in full. In most cases, this date is 10 years from the date of origination.
Q: Can I assume a CMBS loan?
A: No, CMBS loans are not assumable, and any change in ownership must go through a loan assumption process.