Understanding Commercial Mortgage-Backed Security (CMBS) Loans

CMBS or "conduit" loans, as they are sometimes called, are a popular investment vehicle for commercial properties.

Generally speaking, agency loans from Fannie Mae, Freddie Mac, and even HUD provide the lowest-cost financing available on the market today, however, they aren't always ideal for everyone. The high net worth and liquidity requirements may prove to be a barrier for entry for many investors. Additionally, HUD and agency loans are typically only available for strictly multifamily properties (occasionally with a small commercial component allowed), while mixed-use properties with heavy commercial components usually do not qualify. For investors in either scenario, CMBS loans, also referred to as conduit loans, may be the ideal solution.

Besides being the obvious choice for borrowers with a lower net worth or those looking to finance mixed-use properties, CMBS loans can also be an excellent solution for borrowers with credit or legal issues. Since CMBS financing is generally asset-based, lenders are not as concerned with borrower qualifications and are typically more interested in the financial stability of the property itself.

Unlike other key types of apartment financing, CMBS loans are securitized (pooled into a large group of CMBS loans) and then sold to investors on the secondary market. This means that lenders are able to wipe their hands clean of most of the risks associated with holding the loan. However, this can make things complicated for borrowers. Because conduit loans are packaged together and sold to investors, they're not serviced by the lender that initially issued them. Instead, they're serviced by a third-party firm, also referred to as a Master Servicer.

Many investors find that these firms have a reputation for inflexibility and may not be willing to offer loan modifications (as a bank or agency lender occasionally might) in the case of financial hardship. Traditionally, if a CMBS loan goes into default, the Master Servicer will actually send the loan to be serviced by a different company, known as a Special Servicer. The Special Servicer will then determine whether the loan can be reasonably modified or whether they should initiate foreclosure proceedings on behalf of investors.

Still, many investors will find that the benefits of conduit loans far outweigh the risks, and CMBS financing may not only be the more attractive, but also the more realistic funding option when compared to the strict eligibility requirements of the agency alternatives.

2021 Sample CMBS Apartment Loan Terms

  • Loan Size: Generally $2 million+

  • Loan Term: Typically a 10-year fixed-rate loan (though other term lengths may be available)

  • Amortization: 20-30 years

  • Pricing: Starting at 200bps over the relative swap rate or Treasury

  • Amortization: 25-30 years

  • Leverage: 75% Maximum LTV

  • DSCR: Minimum 1.25x DSCR

  • Debt Yield: Minimum 6.5% DY

  • Recourse: Loans are generally non-recourse with standard “bad boy” carve-outs

  • Reserves: Insurance, taxes, leasing costs, and replacement reserves are often required, though this varies on a deal-by-deal basis.

  • Prepayment: Yield maintenance or defeasance


  • Competitive interest rates.

  • Loans are non-recourse.

  • High leverage; typically up to 75% LTV.

  • Flexible loan sizes.

  • May be ideal for borrowers with mild credit or legal issues.

  • Qualified borrowers often have the option of adding mezzanine debt or preferred equity to their capital stack to increase leverage.

  • CMBS loans are generally fully assumable.

  • Cash-out refinancing available.


  • Loans can be pricey to exit.

  • Loans will not be serviced by the borrower's original lender.

  • Borrowers may face restrictions as to how they operate their property.

  • One to two-year lock-outs may prevent prepayment.