While it’s true that a bank loan and a CMBS loan, which is commercial mortgage-backed security, are similar- they are not the same. Traditionally, a CMBS loan is attractive to commercial borrowers because they often offer lower interest rates, high loan-to-value ratios, and what seems like an endless stream of capital. If you are thinking about getting a CMBS loan, you’ll want to follow these tips.
Tips to Negotiate your CMBS Loan
Below, we are going to talk about negotiating your CMBS loan. There are several things that you should consider. Firstly, you should be represented by an attorney with CMBS loans experience. Then, keep the following things in mind.
CMBS lenders make loan payments due at the same time as other borrowers in the pool of loans. Additionally, the lender can unilaterally change this at the time of securitization. You can’t do much about this. However, by knowing about it ahead of time, you can be ready for the change.
Though this is the same as with traditional loans. It would be wise to look out for the cash management agreements to ensure that there are minimal occasions where the primary or special servicer must be involved.
It is not an ideal situation when the CMBS borrower needs to convince the primary or special servicer that cash is needed to address operational issues. Keep in mind that there are no incentives for the primary servicer to deviate from the loan documents. The special servicer is going to act in the best interest of their bondholders.
Typically, a CMBS lender requires that the property securing the loan remain separate from other assets. This can be done if the borrower creates an SPE or special purpose entity. Which holds a single asset. This also happens in traditional loans, but CMBS loans have much stricter requirements regarding the SPE.
The key is to ensure that any of the SPE requirements, such as ownership, operations, solvency, separateness, indebtedness, etc., are capable of performing.
By this point, you should see a theme. You want to ensure that the CMBS loan documents limit how many times you must go to the primary or special servicer. This also applies to cash reserves.
The CMBS borrower must ensure that there are no caps on the reserve requirements so that if they reach a specified amount, the borrower no longer has to pay into the account. If possible, the borrower should keep the use of reserves broad.
Finally, as a borrower, you want to ensure that there are as few disbursement conditions as possible and the conditions are objective and not up to the discretion of the primary or special servicer.
In addition to confidentiality, the CMBS borrower will want to look at the financial reporting requirements. Make sure that the timing for reporting is aligned with your practices. You also want to make sure that the financial reporting format conforms with your operating practices. Finally, be sure that documents are restricted from declaring default if the borrower does not report financials.
CMBS loans are a lot like traditional loans, with a few minor differences. If you are looking into a CMBS loan, there are some things you need to know that you can negotiate. Reach out to Commercial One Group if you need assistance navigating the word of CMBS loan.