Posted by Patrick S. Lawson on May 10, 2006 at 09:24:49:
In the commercial world there are a couple of funding sources:
Conduit loans and CMBS (commercial mortgage backed security) as pretty much the same thing.
A conduit lender originates commercial loans and then pools these loans into a trust. A rating agency rates the mortgages in the trust at which point bonds are issued and bought by investors.
The primary advantage to conduit loans is the rate. For example on a million dollar multi-family loan a conduit lender may offer a rate at 1.30% above the 10 year treasury (6.5% range) amortized over 30 years with a bullet in year 10 and a portfolio lenders rate may be 7.125% fixed for 10 years, adjusting thereafter and amortized over 30 years.
Fees tend to be higher on conduit loans.
Conduit loans do not have a standard pre-payment penalty.
Generally there is a lock out period…during a lock out you cannot sell, refinance or payoff the loan. After the lock out period there is usually a “defeasance” period.
If you defease on the loan you must substitute your collateral for another peiece of collateral (generally a bond) paying the same yield to the investor as the note. Not only would you have to replace the collateral for the remaining term of the loan you would have to pay third party costs as high as 70,000…the point is this…you do not want to defease on a loan.
Impounds are another point of contention. Many commercial portfolio lenders require taxes and insurance to be impounded. Conduit lenders tend to require taxes, insurance, tenant improvements, capital replacement reserves, and lease commissions to be impounded.
Conduit loans make sense if:
The loan balance is above 1 million.
The property is stabalized.
The borrower intends to hold the property atleast 10 years.