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.
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.