CMBS conduit loans are underwritten based on the income generated from tenant leases less property operating expenses, usually the most recent 12 months’ actual expenses incurred. The calculation to determine expenses can become difficult for newly built and occupied properties. Why? There is no expense history to determine utility and other operating costs, and sometimes real estate taxes are not based on the completed building assessment because the tax assessor has not reassessed the property based on its completed value. Without accurate expenses, net property cash flow is difficult to determine with accuracy, so the property would need to operate for 3-12 months before closing a CMBS conduit loan until expense can be accurately determined.
However, certain circumstances exist in which a CMBS conduit loan can be closed without operating expense history. When tenant leases are “net,” a CMBS conduit loan can be closed when tenants move in and start paying rent, even though there is no operating history. A net lease means that the tenant reimburses the landlord for all operating expenses. This lease structure is very common in retail shopping centers and sometimes in office and industrial properties.
Since the tenants reimburse the landlord for expenses, it is not critical that the expenses be accurately determined as the cash flow from the property leases will remain the same whether expenses are higher or lower than estimated.