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Benefits of CMBS loans today

GABE IRIZZARY
GABE IRIZZARY

By Gabriel Irizarry, partner, Saratoga Springs Capital

In today’s unique borrower-friendly financing environment, a Commercial Mortgage Backed Securities (CMBS) loan is a great option for many property owners looking for debt financing greater than $2 million on their stabilized commercial real estate property.

Saratoga Springs Capital recently published a research and analytics report that outlines the benefits of executing a CMBS loan in the current economic cycle.

A few of the benefits the research highlights are that interest rates and cap rates are at “eye-opening” historical lows.
The 10-year swap and treasury rates are well below their long-term historical average and treasuries have not been this low since 1962.

Furthermore, competition is at an all-time high. Commercial real estate concentrations at banks, whether a small community bank or major national bank ,are rising.

Real estate capital fundraising also continues to increase. According to Preqin data, Q1 2015 saw 24 private real estate funds reach a final close, raising an aggregate $29 billion in institutional commitments, making it the most successful quarter since Q4 2013.

Saratoga Springs Capital highlights that the CMBS landscape alone hosts about 50 lenders. These lenders also have different appetites for property type, loan size, and/or geography, which at times will tailor their lending aggressiveness.

Gordon Sinclair, the founding principal of Saratoga Springs Capital, emphasizes the benefit for all markets to begin or continue accessing the CMBS debt platform: “In secondary and tertiary markets, you find many borrowers who have a strong aversion to CMBS based on stigma. They feel it is either expensive, cumbersome, or simply lacks flexibility.

“In a financing environment such as the one we are in today, borrowers should consider CMBS among every other platform available to them.

“Optimizing as much as you can now will not only help your current bottom line, but give you much better padding in the case of a downturn. Additionally, the CMBS servicer platform can be flexible if one initially structures or understands how to navigate within the financing platform.”

So why not CMBS?

Borrowers in secondary and tertiary markets across the country seem to be under utilizing CMBS in their real estate portfolios.
Less than one percent of commercial real estate property owners in the New York Capital Region accessed the capital markets via CMBS compared to greater than 32 percent for the New York City metropolitan area within the past two years for office properties.

Tampa and Oakland are other examples of non-prime markets with lower CMBS exposures.

In order to give the strongest consideration to CMBS financing, understanding its inner workings is key.
In the current debt environment, CMBS in many instances is cheaper to execute, despite the more expensive upfront closing costs.

Closing costs for a CMBS loan can sometimes cost approximately double the amount compared to balance sheet or other lending platform loans. This, however, can be economically deceiving.

The overall cost of financing in many instances can be at least 10 percent cheaper. This is due to better CMBS loan terms such as a lower fixed rate for 10 years, which does not reset after five years, favorable amortization schedule sometimes with initial interest-only periods, as well as other economic and qualitative variables such as non-recourse.

gabeirizzaryTABLE

 

The table at right outlines how the borrower’s savings more than offset the slightly higher lender loan fees and expenses for a CMBS execution versus other lending platforms.

If interest rates rise in the future, the savings the borrower could have realized today will only decrease as the opportunity to capitalize on these historically low interest rates will diminish with time.

With the current historically low rate environment, increasingly competitive lending landscape, and increased debt capital available, one can expect that many borrowers in secondary and tertiary markets across the country will soon begin to ask their staff, brokers, and advisors, “Why not CMBS?”

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