Recently, commercial real estate financing has seen the rapid expansion of Single-Asset, Single-Borrower Commercial Mortgage Backed Securities (SASB). SASB provides investors with increased transparency and underwriting information so that more informed investment decisions may be made.
Loans used for Class A properties in high-end markets typically fall into this category.
CMBS Financing
CMBS financing has quickly become a go-to choice for commercial real estate (CRE) investors, providing many advantages such as transparency, direct exposure to specific properties, risk mitigation, and customization. Furthermore, CMBS financing opens access to capital markets while improving transaction efficiency while simultaneously increasing investor demand for typical property loans with improved financing terms and increasing access to capital markets. Nonetheless, this form of finance carries certain risks which must be carefully managed before investing.
CMBS debt stands out as an appealing financing solution because it is non-recourse. This means that lenders only have recourse to collecting collateral if any default occurs – making these loans more flexible than traditional bank debt and appealing to many borrowers looking for financing solutions with more flexibility than bank debt alone. Nonetheless, before opting for this loan financing option, it’s essential to know its associated risks.
CMBS loan processes may be complex and time-consuming, but they’re worth your while to secure the best terms possible for your property. Underwriting typically entails full appraisal and Phase I environmental assessments of property and checks on borrower credit history, net worth, and commercial real estate experience. Furthermore, lenders typically require third-party reports such as title reports and lease analyses from third-party providers before offering financing terms to borrowers.
CMBS lending continues to increase despite market challenges. Single asset single-borrower CMBS loans saw their issuance increase 230% year-over-year during Q1 2021 alone! This trend can be explained by the increasing popularity of single-asset, single-borrower loans backed by high-end properties in key markets as collateral.
Comparative to other CRE finance options, CMBS loans tend to offer shorter loan terms and amortization periods than their counterparts, allowing borrowers to avoid prepayment penalties while making interest-only payments possible. Furthermore, defeasance requirements need to be fulfilled to transfer the loan to another party.
Single Asset Single Borrower (SASB) CMBS
Single Asset, Single Borrower (SASB) loans are a widely utilized form of commercial real estate financing. These financial instruments use first-lien mortgages on commercial properties as collateral before pooling them with similar loans, packaging them into bonds, and selling them on the secondary market to investors. SASB loans provide property owners with increased access to capital markets at more favorable terms while meeting regulatory oversight, which protects investor rights and ensures securities meet relevant laws.
Single Borrower Commercial Mortgage Backed Securities deals have grown remarkably due to improved risk assessment, transparency, and loan/deal structures. Their issuance has even overtaken conduit loans recently – and is projected to keep expanding further into the future.
CMBS financing’s key advantage lies in expanding access to capital markets for large, complex projects. This gives commercial property owners more opportunity for expansion and growth while decreasing bank financing needs. Furthermore, it offers better credit terms than alternative debt alternatives like private equity or mezzanine financing.
CMBS financing offers several distinct advantages, not the least of which is its simplicity. After the application and underwriting processes have been completed, borrowers can receive their loan approval letter in as little as ten days and then submit all necessary documentation and complete the closing process for their loan. Furthermore, CMBS lenders provide financing solutions for various commercial real estate assets, including retail stores, offices, and industrial assets.
While CMBS financing offers many advantages, there are also certain risks to be aware of. These include default risk, prepayment risk, and interest rate risk – default is defined as a failure by borrowers to make loan payments, while prepayment and interest rate risks refer to changes in borrowing costs.
In the event of default or prepayment, servicers will work closely with borrowers to find solutions; however, the time left until their rated final distribution date can affect how much borrowers may lose in such instances. Therefore, it is vital for commercial property owners to thoroughly consider all potential risks of CMBS financing before selecting a lender.
CMBS Loans
CMBS loans are popular with commercial property owners because they allow them to take advantage of capital market funding without relinquishing control or ownership of their properties. Furthermore, accessing a broader investor pool means more competitive financing terms and potentially lower borrowing costs; moreover, CMBS loans also offer nonrecourse financing in case there is a default on mortgages owed by property owners themselves.
CMBS lenders generally combine multiple CRE loans into one CMBS bond that they then sell off to investors for cash, with the original lender receiving repayment and being repaid so they can issue more CRE loans with fixed or floating rates to meet various property types and market segments.
SASB CMBS issuances rose throughout 2018 and 2019 but dropped off significantly in 2021 before rebounding and becoming an increasingly popular method for financing large commercial properties around the globe.
A commercial mortgage-backed securities loan (CMBS loan) may be secured by one property or by multiple properties owned by one borrower or group of related borrowers, with loans typically exceeding $100 million in size. Securities can either be issued in senior tranches – which would first be repaid should default – or junior tranches, which carry higher risk and more significant interest rates.
When a commercial mortgage-backed security (CMBS loan) is secured by one asset, it is considered a single-asset single-borrower (SASB). On the other hand, when multiple properties owned by the same borrower or affiliates are used as collateral for multiple-asset single-borrower (MAST) CMBS securities.
Unlike residential mortgages, most commercial property loans do not amortize, meaning at the end of each loan term, the borrower will owe a large balloon payment. Therefore, many commercial property owners must refinance their loans regularly to cover this balloon payment, leading billions of dollars of commercial mortgage-backed securities (CMBS) debt to mature and potentially cause market fluctuations and even possible defaults as these loans come due.
CMBS Loan Approval
Since 2008’s market crash, CMBS lending hasn’t seen as much activity yet remains viable. Loan volume has increased over the last 4-5 years, with much of it coming from single asset single borrower (SASB) loans, which securitize priority mortgage loans backed by commercial real estate that back a single property or group of properties; traditional CMBS financing involves securitizing multiple loans representing individual assets or borrowers into one security.
SASB transactions usually involve loans of $200 million or more and affect cross-collateralization and default. They’re designed for exclusive, Class A properties such as high-end apartment buildings in top markets; due to higher leverage requirements and property requirements, they tend to be more expensive than other CMBS financing.
As with other CMBS loans, borrowers face risks associated with the underlying debt, such as default risk, prepayment risk, and interest rate risk. Default risk refers to being unable to meet loan payments, while prepayment risk refers to paying off early. Interest rate risk arises from rising interest rates that increase loan payments – as will default risk in cases of inability to make loan payments or early pay-off risk.
Another major issue with CMBS is the power and leverage of special servicers regarding workout issues. Depending on the terms of their PSAs, special servicers can negotiate loan modifications with borrowers directly, foreclose on defaulted properties, or sell defaulted loans – leaving borrowers feeling helpless as their efforts at finding an equitable solution with lenders falter.
CMBS may not be suitable for every investor or developer in commercial real estate, but it offers many distinct advantages that other forms of financing don’t. Most significantly, its primary advantage lies in being tailored specifically to each project and often the most cost-effective financing choice for larger projects – provided borrowers understand the risks involved and take proper precautions before proceeding with this type of funding option.
