While the recent rise in the Swap rate indexes used to set interest rates for CMBS conduit loans has slowed rate-sensitive borrowers from closing loans, the rise has not deterred borrowers who use the CMBS conduit loan as a tool to extract excess equity in their real estate assets.
“Whenever I discuss the suitability of a CMBS conduit loan for a potential borrower, the first thing I ask is (1) whether they are seeking to obtain cash-out proceeds above an existing mortgage through a refinance and (2) how important a non-recourse feature is for both purchase and refinance scenarios,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “I ask these questions because they are the two greatest competitive advantages that CMBS conduit loans offer over other commercial loan products.”
Particularly powerful is the unrestricted cash-out element of CMBS conduit loans. Borrowers can take cash up to the maximum loan-to-value without any restrictions on the use of funds. “One of the most aggressive competitors for CMBS conduit lenders is community banks that specialize in commercial lending,” said Sneden. “However, they are not keen on unrestricted cash-out proceeds distributed to the sponsor for purposes unrelated to the asset being financed. We recently completed a hotel refinance that was a $7.5-million cash-out secured by a property that was previously unencumbered. The best offer from a community bank on that hotel refinance was $4.0 million.”
The conduit loan rate was higher than the community bank rate, but it did not matter, as the proceeds, together with another $500,000 in sponsor cash, was to be utilized to construct another hotel for $8 million. The CMBS conduit loan rate was still less than the rate on a construction loan and much less hassle.
“We probably provided over $100 million of cash-out proceeds through CMBS conduit loans in the past 12 months,” noted Gary Unkel, Senior Loan Originator at ValueXpress. “While rising interest rates are a concern, our focus is on locating clients who have excess equity and helping return the equity through a cash-out CMBS conduit loan. Those borrowers tend to be less rate sensitive and still think 5% is really not that bad.”