{"id":594,"date":"2020-03-31T12:48:13","date_gmt":"2020-03-31T18:48:13","guid":{"rendered":"http:\/\/agcus.net\/?p=594"},"modified":"2026-02-04T19:16:46","modified_gmt":"2026-02-05T01:16:46","slug":"time-to-rush-to-get-a-conduit-commercial-loan","status":"publish","type":"post","link":"http:\/\/streamapse.com\/TAR\/?p=594","title":{"rendered":"Time to Rush To Get a Conduit Commercial Loan"},"content":{"rendered":"

Conduit loans, also known as CMBS loans, enjoy a fixed rate for a whopping ten years. \u00a0Unlike a fixed-rate commercial loan from a bank, there is no rate readjustment after five years. \u00a0The rate is fixed for the entire ten years.<\/p>\n

And with ten-year Treasuries at just 0.79%,\u00a0there has never been a better time in history to get ten-year, fixed-rate conduit loan.<\/strong><\/p>\n

Conduit loans are priced at some negotiated spread over the higher<\/em> of ten-year Treasuries or corresponding interest rate swaps. \u00a0Here is where you go to find ten-year Treasuries<\/a>. \u00a0Here is where you go to find today’s interest rate swaps<\/a>\u00a0(as known as the swap rate). \u00a0Here is another site that provides interest rate swaps<\/a>.<\/p>\n

Today (3\/8\/20), ten-year Treasuries are at 0.79%, and ten-year interest rate swaps are at 0.81%. \u00a0Therefore we will use the higher of the two indices – interest rate swaps.<\/p>\n

Okay, but what is the spread or margin over the index? \u00a0Conduits are pricing their office, retail, and industrial commercial permanent loans at 140 to 290 basis points over the index.<\/p>\n

Therefore, we are talking about conduit commercial loans priced at between 2.21% to 3.71%.<\/strong> \u00a0Wow! \u00a0So who gets the 2.21% rate, and who has to pay 3.71%? \u00a0It depends on the loan size, the risk, the debt yield ratio and the tenancy.<\/p>\n

The larger the deal, the smaller the spread. \u00a0The safer the deal, the lower the spread. \u00a0For example, if your property is located on Madison Avenue in New York City, you will enjoy a lower spread than a deal located on a nice retail street in Salt Lake City. \u00a0Madison Avenue is a more proven location.<\/p>\n

There are some properties, however, that sell for such incredibly low cap rates – for example, Madison Avenue in New York City – that the debt yield can be too low. \u00a0This is a bad thing. \u00a0Sometimes the debt yield ratio on that Salt Lake City property can be more attractive to a CMBS investor.<\/p>\n

Do not confuse the debt yield ratio<\/a> with the debt service coverage ratio. \u00a0Interest rates are so low that it is easy for most commercial properties to offer a 1.25 or higher debt service coverage ratio today. \u00a0The ratio is almost irrelevant when it comes to conduit-size deals ($5MM and larger).<\/p>\n

The quality of your tenants also determines your spread over the index. \u00a0Quality<\/strong><\/em> refers to strength of your tenants. \u00a0If you have a shopping center anchored by Target or Krogers, you will enjoy a tighter spread than a shopping center anchored by a mom and pop grocery story.<\/p>\n

CMBS loans are made by commercial real estate mortgage investment conduits “REMIC’s”, known as conduits<\/strong><\/em>. \u00a0There are specialized commercial mortgage companies that originate large, cookie-cutter commercial permanent (long term first mortgage) loans for eventual securitization. \u00a0In layman’s terms, a conduit loan is a very plain-vanilla first mortgage on one of the four basic food groups<\/strong><\/em> – multifamily, office, retail, and industrial properties.<\/p>\n

Is your deal kinky? \u00a0Does it need a long story to explain it. \u00a0If so, its probably not a conduit-quality deal.<\/p>\n

But it is important to note that your property does NOT need to be almost brand new and very beautiful. \u00a0Life company lenders demand such properties, but most conduits would be perfectly happy to make $8 million permanent loans on forty-year-old neighborhood shopping centers or on occupied, downtown, office buildings.<\/p>\n

Every commercial lender prefers to make loans on multifamily properties, so the spreads on multifamily deals are about 10 bps. tighter. \u00a0You will not be shocked to learn that hospitality spreads are fifty basis points higher than standard conduit deals.<\/p>\n

What about loan-to-value ratios? \u00a0You will seldom get a conduit lender to go higher than 65% LTV on a hotel. \u00a0The loan-to-value ratios on the four basic food groups are typically between 70% to 75%. \u00a0The higher the LTV and the lower the debt yield, the higher the spread (and eventually the higher the interest rate) that the borrower will pay.<\/p>\n

Lastly, conduit lenders do NOT lock in their rates at application. \u00a0Most of them will, however, lock in their spreads, while the conduit commercial loan is in processing. \u00a0That being said, there will be a floor of 5 bps. to 10 bps. below the interest rate quoted at application. \u00a0In other words, if interest rates go up during application, the borrower will have to pay a higher rate. \u00a0If interest rates fall, the borrower might enjoy a slightly lower rate.<\/p>\n

Investors, I know you are all freaked out that you might die from this coronavirus (its out to kill all of us “old-gomers”); but you can apply for a conduit loan from the safely of the virus bubble in your home. \u00a0Focus.<\/em> \u00a0If you can close a conduit commercial loan during this crisis, your cash flow, and that of your heirs, will be fantastic! \u00a0Git ‘er done. Ten-year Treasuries may never be lower.<\/p>\n

By George Blackburne<\/p>\n","protected":false},"excerpt":{"rendered":"

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