{"id":469,"date":"2019-11-20T16:05:16","date_gmt":"2019-11-20T22:05:16","guid":{"rendered":"http:\/\/agcus.net\/?p=469"},"modified":"2026-02-04T19:16:46","modified_gmt":"2026-02-05T01:16:46","slug":"how-conduit-commercial-loans-are-priced","status":"publish","type":"post","link":"http:\/\/streamapse.com\/TAR\/?p=469","title":{"rendered":"How Conduit Commercial Loans Are Priced"},"content":{"rendered":"

I have a great training article about commercial loans for you today. \u00a0How do conduits price their commercial loans? \u00a0After all, commercial lenders cannot buy a forward commitment from Fannie Mae or Freddie Mac, like a residential mortgage banker; yet most commercial loans today are fixed rate loans. \u00a0How on earth do the commercial loan officers, working for these big-time commercial lenders, know what to quote?<\/p>\n

In a prior training article, I explained that most commercial bankers quote their fixed rate commercial loans at 275 to 350 basis points over five-year Treasuries. \u00a0You will recall that a basis point<\/strong><\/em> is 1\/100th of one percent, so 300 basis points equals one 3.00%.<\/div>\n
Example:<\/strong><\/div>\n
Suppose you call your local commercial bank and speak to a commercial loan officer about a commercial loan. \u00a0He will look up five-year Treasuries<\/a> and see that on July 3rd, 2019 they stood at 1.74%. \u00a0He will then add between 2.75% (275 basis points) and 3.5% (350 basis points) to 1.74% to determine what rate to give you.<\/div>\n
Does your client keep more cash on deposit than Fort Knox with his current bank? \u00a0If so, in an effort to win your client’s deposit accounts, the banker might quote you 4.49% for a ten-year, fixed rate commercial loan, with one rate readjustment at the end of year five. \u00a0If your client is a mere mortal, rather than a cash demigod, the bank will probably quote him 5.24%.<\/div>\n
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But these quotes are from banks. \u00a0How would a conduit lender quote his commercial loan? \u00a0After all, conduit loans are usually larger than $5 million<\/strong>, and the properties are reasonably desirable. \u00a0Their rates on commercial loans have to be more attractive than bank loans, right?<\/div>\n
You will recall that conduits originate commercial loans for the CMBS market. \u00a0CMBS<\/strong><\/em> stands for commercial mortgage-backed securities. \u00a0Think of a CMBS loan as a huge, fixed-rate, commercial real estate loan written to cookie-cutter standards.<\/div>\n
CMBS lenders have very little flexibility (that darned cookie cutter), but if you qualify, you get a ten-year, non-recourse, fixed rate commercial loan at a rate that is at least 40 basis points cheaper than what a bank can offer. \u00a0When you are talking about a commercial loan of $10 million, 40 basis points is real money. \u00a0In addition, conduit loans are FIXED for the entire ten years!<\/strong><\/div>\n<\/div>\n
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So when you call a commercial loan officer at a conduit, how does he know what to quote you? \u00a0Remember, unlike residential loans, you cannot lock your rate on a commercial loan. \u00a0When you apply for a conduit loan, you have to take the current fixed rate at the moment of closing<\/strong>, and the process takes at least 75 days. \u00a0Every day, from the time of application until the day of closing, your interest rate will change.<\/div>\n
So I recently asked my good friend, Tom Lawlor at Morgan Stanley, how conduit commercial loans are priced. \u00a0Here are his kind answers:<\/div>\n<\/div>\n
<\/div>\n
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Q: \u00a0Are CMBS loans still quoted based on swap spreads?<\/div>\n
A: \u00a0Conduit loans are quoted as the greater<\/strong><\/em> of (matching) Treasuries or swap spreads, plus an agreed upon margin.<\/div>\n
Swap spreads<\/strong><\/em> are financial instruments where nervous corporate Treasurers will swap their adjustable rate loans from the bank for a fixed rate loan from some speculator. \u00a0Obviously, for taking the risk that interest rates might skyrocket, the speculator makes a handsome profit on the deal.<\/div>\n
Swaps spreads change daily, and you can find them posted here<\/a>.<\/div>\n<\/div>\n
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Example:<\/strong><\/div>\n
Your client is seeking a $12 million, ten-year, fixed rate, non-recourse commercial loan from a conduit. \u00a0Because your client is seeking a ten-year commercial loan, the conduit quotes him a negotiated margin over the greater<\/strong><\/em> of ten-year Treasuries (notice the matching term) or ten-year swap spreads.<\/div>\n
On the date that the attorneys draw the loan documents, ten-year Treasuries are 2.00% and swap spreads are 2.15%. \u00a0The conduit will therefore use the greater of the two indexes.<\/div>\n
Q: \u00a0What are some typical margins over swap spreads for multifamily?<\/div>\n
A: \u00a0140-185 bps<\/div>\n<\/div>\n
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Q: \u00a0What are some typical margins for office, retail, and industrial properties?<\/div>\n
A: \u00a0The margins are similar to those of multifamily. \u00a0Pricing is most determined by the debt yield ratio<\/a> or the debt service coverage ratio (DSCR), with the margins on hotel loans being 15-30 bps wider.<\/div>\n
Note:<\/strong><\/div>\n
Because I didn’t want you to get confused between the speads over the index and swap spreads, I have used the term, margin<\/strong><\/em>. \u00a0In real life, where the lofty conduit lenders dwell (remember, their minimum loan is $5 million), they use the term, spread<\/strong><\/em>, over the index, rather than margin.<\/div>\n<\/div>\n
<\/div>\n
By George Blackburne<\/div>\n","protected":false},"excerpt":{"rendered":"

I have a great training article about commercial loans for you today. \u00a0How do conduits price their commercial loans? \u00a0After…<\/p>\n","protected":false},"author":1,"featured_media":470,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15,1],"tags":[5,14,16,17],"class_list":["post-469","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-insights","category-latest-news","tag-commercial","tag-conduit","tag-loans","tag-priced","entry","double"],"_links":{"self":[{"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=\/wp\/v2\/posts\/469","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=469"}],"version-history":[{"count":1,"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=\/wp\/v2\/posts\/469\/revisions"}],"predecessor-version":[{"id":17723,"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=\/wp\/v2\/posts\/469\/revisions\/17723"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=\/wp\/v2\/media\/470"}],"wp:attachment":[{"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=469"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=469"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/streamapse.com\/TAR\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=469"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}