During the credit crisis, from late 2008 thru mid 2010, conduit origination was largely non-existent. Today the CMBS market is back on solid footing and aggressively seeking qualified lending opportunities. Loan spreads have generally remained steady on a slow decline over the past 12 months, while U.S. Treasuries has remained historically low; and this combination presents very attractive all-in rates for borrowers. In fact, at the time of this writing in the fourth quarter of 2013, rates for 10-year CMBS loans were hovering right around the 5 percent range.
CMBS lenders offer non-recourse loans with five-, seven- or 10-year fixed rates and amortizations up to 30 years. Leverage up to 75 percent LTV is available, and lenders have increasingly become more aggressive with their debt-yield targets, which is the net cash flow divided by loan proceeds. Throughout 2012, there was a firm 10 percent debt-yield minimum. In the market today, a 9 percent debt-yield minimum is increasingly common.
On CMBS loans, the available prepayment options are limited to yield maintenance or treasury defeasance, which is a factor borrowers should understand before proceeding with this debt structure. They’re also assumable, which is a nice feature that can be very valuable in a climate of rising interest rates.
CMBS lenders are increasingly competing for deals at lower loan sizes and in secondary markets. Although lenders prefer deals over $3 million in primary markets, transactions as low as $1.5 million in secondary markets were processed via CMBS lenders in 2013.
CMBS loan origination volume was strong in 2013, and most market prognosticators foresee continued growth in 2014. By all accounts, there’s reason to be optimistic about the future of the CMBS markets.
Insurance Companies, aka Life Companies
Insurance companies are by nature among the most conservative lenders in the market, representing roughly 13 percent of all outstanding mortgage debt. Insurance companies prefer stabilized assets and tend to be very picky in terms of location, size, age and physical attributes. In addition, these lenders prefer owners with high levels of experience and strong personal balance sheets. Most life companies have a minimum loan size of $5 million, but a handful will lend as low as $1 million.
Insurance companies prefer lower leverage transactions and typically do not advance more than 65 percent of their stressed underwritten value. The cornerstone attribute of life companies is their flexibility. For example, while five-, seven- and 10-year fixed-rate loan terms are most common, insurance companies can also offer fully amortizing loan structures between 10 and 25 years. As of the fourth quarter in 2013, interest rates for life company loans were extremely attractive, typically ranging from 3 percent to 6 percent, depending on the structure of the loan. Prepayment penalties can also vary greatly, and while yield maintenance is common, other structures can be negotiated.