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Conduit Loan in Commercial Real Estate

A conduit loan, also known as a CMBS (Commercial Mortgage-Backed Securities) loan, is a commercial real estate loan secured by a mortgage on a commercial property. These loans are structured by conduit lenders, which include commercial banks or investment banks.

What is a Conduit Loan in Commercial Real Estate?

A conduit loan (CMBS loan) involves commercial real estate first mortgage debt pooled together and held in a trust. This pool consists of single loans of varying property types, sizes, and locations. The trust then releases a series of bonds with different yields, durations, and payment priorities. Investors can choose which bonds to purchase based on their risk tolerance, yield expectations, and investment duration preferences.

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Structure of Conduit Loans

Conduit loans are divided into two main categories:

  • Loans to be Securitized (CMBS Loans): These are pooled together and transferred to a trust, which issues a series of bonds with varying yield, duration, and payment priority. Nationally recognized rating agencies assign credit ratings to these bonds, ranging from investment grade (AAA/Aaa to BBB-/Baa3) to below investment grade (BB+/Ba1 to B-/B3), with some classes being unrated and subordinate to the lowest-rated bond class.
  • Portfolio Loans: These are held on the lender's balance sheet until maturity.

Key Takeaways

  • Secured by Commercial Property: Conduit loans are secured by a mortgage on commercial properties such as office buildings, shopping centers, and other types of commercial real estate.
  • Structured by Conduit Lenders: These loans are arranged by conduit lenders, including commercial and investment banks.
  • Pooled Mortgage Debt: The pooling of individual loans makes them more attractive to investors by diversifying risk and offering various investment options.
  • Investor Appeal: The structure allows investors to enter the commercial mortgage market, increasing the availability of funding for commercial mortgage loans and promoting competitive pricing.

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