A CMBS or commercial mortgage-backed securities loan can help you finance a commercial real estate project without going through traditional bank channels.
But while these loans work well for stable, income-producing properties, they’re often unsuitable for transitional assets or projects that require flexible financing terms.
In this guide, we’ll break down CMBS loan pros and cons so you can decide if it’s the right type of loan for your CRE project.
How CMBS loans work
CMBS financing starts when a conduit lender — often tied to an investment bank, insurer, or mortgage firm — issues commercial real estate loans specifically for resale in the CMBS market.
These loans follow standardized criteria so that they can be bundled, converted into bonds, and sold to investors through a process called securitization.
Once enough of these loans are issued, they’re pooled together and transferred to an investment bank, which structures them into commercial mortgage-backed securities or CMBS.
The bonds are then split into risk-based tranches and sold to investors. Senior tranches get paid first while lower-rated ones take losses if any loans in the pool default.
Also Read about Difference Between CMBS & CML
The commercial mortgage-backed securities loan structure allows individual real estate loans to be turned into tradable securities and provides borrowers access to capital that wouldn’t be available through traditional lending channels. These loans can be used to finance:
- Office buildings (single or multi-tenant)
- Retail centers and standalone retail properties
- Hotels (ranging from full-service to extended stay)
- Industrial warehouses and flex-use spaces
- Multifamily apartment complexes
Typical CMBS loans have 5 to 10-year terms with 25 to 30-year amortization. Since the loan term is shorter, there is often a large balloon payment due at maturity.
The expectation is that the property will either be valuable enough to sell or the borrower will be able to refinance when the balloon payment comes due.
CMBS loan pros and cons
Advantages of CMBS Loans
Non-recourse financing
If something goes wrong and the property doesn’t cover the loan balance, the lender typically can’t come after your assets and savings.
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Competitive interest rates
Because CMBS loans are sold to a broad pool of investors, they often come with more competitive interest rates than you’d find with private commercial lender or hard money lenders.
Most CMBS loans also offer fixed rates for the full term—usually 5 to 10 years. That kind of predictability makes budgeting and forecasting easier, especially if you’re trying to manage cash flow in an unpredictable economy.
Higher Loan-to-Value (LTV) ratios
CMBS lenders often approve LTV ratios of 75% to 80%, which is higher than what many traditional banks offer.
That means you can finance a larger share of your property purchase and put less of your own cash into the deal. This higher leverage can increase your returns if the property performs well.
Availability for secondary/tertiary markets
Unlike many banks that tend to focus solely on major cities, CMBS lenders are more likely to finance properties in secondary and tertiary markets because they need variety in their loan pools.
Ideal for stabilized properties
If your building is already leased up with creditworthy tenants and has a history of steady performance, you’ll likely have an easier time securing this type of loan.
Investors buying CMBS bonds expect predictable payments, so the underwriting process focuses heavily on cash flow and tenant quality.
Also Read About A Guide to the Securitization of CMBS in the Hospitality Sector
Disadvantages of CMBS Loans
1. Lack of flexibility
CMBS loans follow a strict template because they’re built for securitization. Terms are standardized and rarely tailored to individual borrower needs — this means that you’ll likely run into roadblocks if your property has unusual features or if you need custom terms.
2. Complex servicing structure
You won’t have a direct relationship with a single lender. Instead, you’ll deal with a chain of parties: the master servicer for routine matters, the special servicer if there’s trouble, and a trustee representing investors.
Trying to get approval for a loan assumption, workout, or even a basic modification can take time — and there’s no guarantee it will happen.
3. Prepayment penalties/defeasance
A CMBS loan is part of a larger loan package sold to investors, who each buy a “slice” with the expectation of receiving steady interest payments over the full loan term — typically 5 to 10 years.
If you refinance or sell the property before the loan matures, those interest payments stop early — and you’ll face steep prepayment penalties to make up for that lost income.
Defeasance is often the only option if you need to get out. It lets you release the property from the loan by replacing it with a portfolio of Treasury securities — but to do this, you’ll need to hire legal and accounting teams and pay a premium for the securities themselves.
4. Limited suitability for transitional properties
CMBS isn’t the right financing tool to use if your property needs renovation or currently doesn’t produce a stable income.
Properties in transition don’t match the predictable returns CMBS investors want. For these types of projects, you’ll want to look at bridge financing or private capital.
5. Strict underwriting and due diligence
Expect an intensive approval process. You’ll need to submit detailed documentation on the property and your tenants.
Note also that CMBS lenders stick closely to financial thresholds, so you likely won’t qualify if your DSCR or LTV ratio doesn’t meet the mark.
When are CMBS loans a smart choice?
- You want to hold a stable, income-generating property – The fixed rate locks in your payments and the long amortization means lower monthly debt service. It makes it easier to model long-term cash flow.
- You want to isolate risk to a single asset – Most CMBS loans are non-recourse, which means your personal assets aren’t on the line if the property underperforms.
- You don’t plan to refinance or sell early – CMBS loans come with high prepayment penalties. This isn’t a problem if your strategy involves holding the property for the full loan term, but if you’re planning to exit early, the costs can cut into your returns.
Explore your CRE financing options
CMBS loans are just one way to finance commercial real estate, and they aren’t the right fit for every project.
Bridge loans or hard money may be a better choice or short-term value-add or time-sensitive deals.
To explore more CRE loan programs as a private commercial lender, schedule a meeting with Private Capital Investors. Call 972-865-6206.
