One of the primary causes of CMBS conduit loan defaults for commercial properties is the loss of income when a tenant occupying a large portion of the property vacates or defaults on its lease payments. Typically, when a large tenant stops paying rent, the income from the property is no longer sufficient to cover the mortgage payment, and subsequently, the borrower defaults on the loan for not being able to make the loan payment.
As a result, CMBS conduit loan lenders love what is known as “tenant diverse” commercial properties. These properties have ten or more tenants with no tenant occupying more than 10% of the total space at the property. In addition, staggered lease expirations over several years are highly desired. Why? When properties have many tenants with varying lease expirations, the property can lose one or two tenants and still have enough cash flow to pay the mortgage because the lost income is not that great.
But what if the property has only four or five tenants and the lease expirations are not far apart? Can these properties qualify for a CMBS conduit loan? The short answer is yes. CMBS lenders have developed a loan provision to protect against a large tenant leaving/defaulting. The provision is known as the “Major Tenant” provision and it works like this:
All excess cash flow after the payment of debt service and all applicable reserves will be held by Lender as additional collateral for the loan if any tenant occupying more than 20% of the Property ceases to conduct its normal business operations, defaults under its lease, becomes insolvent, files for bankruptcy, and/or [6-24] months prior to lease expiration for any tenants occupying more than 20% of the Property.
So, the idea is to sweep all property cash flow after debt service into a reserve to be available to pay debt service and tenant improvements/leasing commissions until a replacement tenant is found or the tenant renews its lease.