Commercial Real Estate Loans

Commercial Mortgage Backed Securities (CMBS), also known as Conduit Loans, are an extremely attractive option for stabilized properties with national credit tenants. These loans offer the lowest rates (generally lower than any other bank mortgage option,) with fixed-rate terms of 10 years. Since the collateral is required to be a high-quality, stabilized income property, the rate is fixed against a margin such as US Treasuries, or LIBOR (now SOFR).

The conduit loan is a regulated security with a fixed period and return. CMBS mortgages have two distinct characteristics: they are technically not pre-payable (and if they are, will have a yield maintenance penalty); and they are assumable by another qualified sponsor. This creates a unique, intrinsic value to this class if interest rates start rising. CMBS loans also have special provisions in place to protect the loan in the event of any malfeasance or potential losses.

A conduit loan is packaged into a pool with other similar-type commercial loans, then securitized and sold in the secondary market to institutional investors. The loans in the pool are held in trust and the stabilized property and cash flow serve as collateral for the mortgage-backed security.

This special class of CRE loans may cover Tenant Improvements (T.I.’s) and Lease-up Expenses, allowing an investor to make improvements and cover the costs of lease-up expenses prior to stabilizing a recently improved property.

Investors may use these special CRE loans for a permanent purchase or refinance loan before the collateral is fully stabilized.

There are two main types of CRE debt instruments that may be used with senior debt to increase required liquidity, reserves, or cash assets to a project when needed. The two main types of these CRE debt instruments are Preferred Equity and JV (Joint Venture) Equity. Preferred Equity is used when a minority of the liquidity is required, and is priced at an IRR less than Joint Venture equity (which provides a majority of the liquidity and prices higher accordingly.)

Preferred Equity may be used when the liquidity requirement is less than 50% of the total cash or liquidity value. Preferred Equity is less costly than JV Equity, with its pricing based on an IRR formula (Internal Rate of Return), consisting of an equity component plus a coupon rate.

JV Equity may be used when cash liquidity or reserve requirements are more than 50% of the total liquidity available. JV Equity is priced higher than Preferred Equity, but with similar uses and characteristics including an IRR percentage-based pricing formula.

A Hard Money loan is a type of mortgage that is secured by real property, typically from private money lenders rather than banks. Hard money loans are considered loans of last resort or short-term bridge loans, and thus have a higher cost and lower Loan to Value (LTV) ratio, generally a maximum of 50% LTV. The basis of the loan is the value of the hard asset, or the underlying real property, using the hard asset as collateral.

Hard Money loans are only offered in periods of less than 24 months and on an interest-only debt service, rather than amortizing.

Hard Money Loans are useful in many circumstances for early-stage and/or land acquisition for large projects, or in a time crunch when credit or documentation is unavailable.
Hard money loans may be used in turnaround situations, in short-term financing and by borrowers with poor credit but substantial equity in their property.

Freddie Mac, Fannie Mae, and other agency programs provide incentives or insurance to lenders. This allows them to take on more risk for CRE mortgages by using these programs.

The Federal Home Loan Mortgage Corp., also known as Freddie Mac (FHLMC) insures many multifamily loan programs for multifamily housing, student housing, senior housing, or affordable housing properties. These mortgages may be held in the FHLMC portfolio or sold to bond investors. Terms and options may include fixed or floating rates (which may or may not include an interest-only period) and are typically amortized over 25-30 years. (Note: Shorter-term programs of 5-7 years are available through the PPP, which include fixed rate and hybrid loan choices.)

A Federal National Mortgage Association mortgage, also known as a Fannie Mae mortgage, offers the most competitive terms. These include fixed and floating rate financing for multifamily properties, including apartments, student housing, affordable housing. These terms are especially competitive when paired with the Low-Income Housing Tax Credit (LIHTC) program, for assisted living and other healthcare facilities, mobile home parks and more. Fannie Mae financing is also an option for financing properties previously under HUD legacy programs that are being converted to Section 8 housing under the Rental Assistance Demonstration (RAD) program. However, prepayments can be an issue, and qualifying can be challenging, as Fannie Mae loans require very

Mezzanine financing is a hybrid of debt and equity financing that allows a lender the right to convert to an equity-interest in the company or project in case of a default (generally after other senior lenders are paid).

Mezzanine financing allows for greater flexibility whether additional equity instruments are attached to the debt. Frequently associated with acquisitions and buyouts, Mezzanine financing may be used to prioritize new owners ahead of existing owners in case of bankruptcy.

Mezzanine financing is one of the highest-risk forms of debt, as it bridges the gap between debt and equity financing. It is inferior to pure equity but superior to pure debt. However, as it often receives rates between 12% and 20% per