Many business owners are overwhelmed with the number of financing options available for their commercial real estate purchases. Commercial mortgage-backed securities, or conduit loans, are financed from other commercial real estate investments.

With CMBS loans, the lender funds the loan at closing. The lender merges several loan packages and creates a series of bonds. These bonds are rated and sold to other real estate investors, allowing the lender to recover their investment and fees. At that point, the borrower no longer works with the initial lender. The borrower transitions payments to a master servicer. The master servicer coordinates payments and escrow accounts. Here are some factors to consider when evaluating the merits of this loan option.

Nonrecourse Loan

With a traditional loan, your lender may ask you to provide personal assets for collateral. With a CMBS loan, lenders use the property as collateral. Because the business owner does not use personal or other business assets as collateral, the lender fees may be slightly higher. However, the cost of the higher fees may be offset by a lower interest rate. As with all loans, the stronger your credit score, the more flexibility you have to negotiate terms.

Assumable Loan

If you sell the property before the loan matures, the buyer may take over payments on the financial package. The lender charges a fee to transfer the loan, but it is typically less than prepayment fees.

Prepayment Fee

Due to the nature of the bonds, lenders discourage you from paying the loan off early. If you choose this option, you will be assessed a prepayment penalty. Commercial real estate loans are typically seen as long-term investments. Most borrowers accept loan terms with the risk of this penalty. You may consider a traditional loan if you prefer paying off your debt early.

Real Estate Option

CMBS loans are tailored to commercial real estate ventures. You may not secure this loan for residential opportunities, such as fix and flip houses. These loans are available for opportunities such as hotels, office parks, apartment buildings and other commercial investments.

Recapitalization Opportunity

Many business owners recapitalize their current properties with this type of loan. This allows them to restructure their capital into debt when interest rates are low or the company is anticipating growth.

There are many things to consider when using CMBS loans. Asking the right questions of your lender is critical as you finance your next commercial real estate opportunity.