Conduit Loan Programs provide low fixed rates for commercial property loans for the purchase or refinance of income producing commercial properties located in the majority of market sectors such as small and medium markets for commercial mortgages up to $50 million and more.
Advantages of Conduit Lending
Conduit lending is advantageous for the borrower because the loan is low cost due to the ability for the loan to be sold in the bond market. When lenders sell the Conduit loan creating additional profits for the lender, thereby allowing the lender to reduce cost and rates so the loan is more attractive to the borrower. Conduit loans for the borrowers can be a feasible solution to acquire a low fixed rate commercial financing because the interest rates are determined from the Treasury rates and a margin that is added by the lender.
Conduit loans provide increased leverage for the investors with 80% to 90% Loan To Value when combined with Mezzanine Financing. Some Conduit loans provide non-recourse options where no personal guarantee is required which can be an additional benefit for the borrower.
Commercial Real Estate Conduit Loan Breakdown
Manufactured Housing Communities
Mobile Home Parks
Retail (Anchored -Unanchored-Weak)
Conduit programs for multifamily housing property loans.
WHAT IS A CONDUIT LOAN?
Generally, Commercial real estate first mortgages are categorized as securitized loans (CMBS loans) and or portfolio loans. Lenders that originate portfolio commercial mortgages will hold and service the loan til maturity unlike a CMBS transaction. CMBS loans are many mortgage loans with different sizes and property types and are pooled together to be sold or transferred to a investor or trust. The investor or trust issues bonds that normally have different yields and terms. Rating agencies will assign credit ratings to the bond classes ranging from AAA/Aaa through BBB-/Baa3 as well as below investment grade (BB+/Ba1 through B-/B3) along with an unrated class that is the lowest rated bond class. By reviewing the investment ratings, investors choose which bonds to purchase. The monthly interest is received from the pools of loans and is paid to investors in order of bond rating (highest rated to lowest rated) which is referred to as a waterfall structure. The principal payments received are also distributed in the order of highest rated bonds to the lowest and un-rated bonds. If borrowers of the mortgages default on their payments or foreclosed upon, then investors in the most lowest bond class loss along with further higher losses for higher bond classes.
REMIC – Real Estate Mortgage Investment Conduit
Securitized commercial real estate loans may be referred to as Real Estate Mortgage Investment Conduit (REMIC). REMIC have favorable tax law which allow the investment trust to be a pass-through entity without being subject to any taxes for the trust. In order to take advantage of the tax benefits, REMIC regulation compliance is required.
CMBS have many attractive features such as the bonds backing the pools of commercial real estate loans are normally valued higher than the value of the matured loans they back. Additionally, liquidity of CMBS’ are attractive to investors in many markets. The borrower benefits from this aspect of the CMBS loans because lenders will provide better rates and terms because they have additional profits from the sale of bonds.
BEFORE CLOSING A CONDUIT LOAN
Servicing of the loans is something to take into consideration when acquiring a conduit loan. Reviewing the loan documents before closing is highly advisable since conduit financing and servicing request can have many rules which will be outlined in the loan documents.
POOLING AND SERVICING AGREEMENT
After the loans are transferred to the trust entity which are then securitized, the Pooling and Servicing Agreement referred to as the PSA of the trust and is used to service the loan. Pooling and Serving Agreement is also used for the distribution of loan profits as well as losses. The difference between portfolio loans and Conduit loans is the the varying guidelines of portfolio loans compared to the standardized procedures of the PSA which is outlined according to the REMIC requirements.
CONDUIT LOAN PARTICPANTS OVERVIEW
Conduit loans have many participants that are involved in the origination, processing and capitalization of the loans such the servicing entities which include the Primary, Master and Special services. Other participants include the Trustee, the investor or buyer, the borrower of the original loan and the rating agencies.
PRIMARY SERVICE PROVIDER
This usually is the bank that originated the loans and works with the master service provider to carry out the required administration and servicing of the loan according to the PSA previously mentioned.
MASTER SERVICE PROVIDER
Master Service Providers are the servicing party that is responsible for ensuring the proper administration and required serving of the loans which in most cases is carried out by the primary service provider. The Master service provider provides these services for the trust.
SPECIAL SERVICE PROVIDERS
Special service providers handle the assumption or transfer of a loan as well as loans that are in default by the borrowers. The Special Service is also providing these services for the trust.
INVESTOR / Buyer
The investor is the buyer of the bonds and is also able to make decisions on asset issues and appointing special service providers.
Trustees handle the financial documents related to the loans and allocate the income payments that are collected by the primary or master service provideers.
Rating agencies provide the ratings of the bonds according the the class grading system. Rating Agencies may also monitor the loan pool performance to provide rating for investors.