Conduit commercial real estate loans (CMBS loans) are long term, fixed rate loans. The typical conduit loan is amortized over 25 to 30 years and is due in 10 years. The rate is fixed for the entire ten-year term. CMBS commercial real estate loans typically enjoy a very low fixed rate.
While a conduit commercial real estate loan is in processing, however, the rate must float with the market. Unlike a home loan, you cannot lock in a rate for a conduit commercial real estate loan. CMBS lenders typically will not lock in the rate while the loan is in processing. Conduit commercial real estate lenders; however, will often try to hold hold their spread over a given index. For example, let's suppose that the market rate for conduit commercial real estate loans most closely follows changes in the ten year Treasury bond. If the yield on ten year Treasury bonds goes up by 25 basis points (one-quarter of one percent), say from 4.5% to 4.75%, you can expect that the typical conduit commercial real estate loan will also go up by 25 basis points. Conduit commercial real estate lenders will therefore quote their rates at a certain spread of ten year Treasuries. They might say to the borrower, "We'll make you a loan that gives us a 1.25 debt service coverage ratio, using a 25 year amortization, and an interest rate equal to 120 basis points (bps) over ten year Treasuries. Based on today's ten year Treasury rates of 4.60%, we could make you a $4,000,000 loan at 5.8% - but this will change, as Treasuries change, while the loan is in processing." I asked a couple of conduit buddies to get me in the noise range over how a conduit would price a $4 million commercial real estate loan today. One wrote: This is not a simple question, you know. I am assuming that the loan (as you suggest) is $4,000,000…..which places it in the “small loan” world….so, there is not very much finesse in the pricing. All CMBS fixed-rate product is priced off of the related US Treasury bond index; i.e. 5-year; 10-year; 15-year, etc. The swap spread is not discussed with the borrower, but is a consideration in establishing the interest rate spread quoted to the borrower. As you see, when the swap spread rate declines, so does the overall interest rate spread, and vice versa.
For a low leverage loan (50%+/-), which many borrowers choose simply to “re-set” at the lower rate, the spread would be in the area of 90 to 100 over; for a full leverage first mortgage, the spread would probably by in the area of 105 to 125, depending upon quality. These would not vary much, if at all, by property sector. Generally, the first mortgage will go up to 80% (depending upon quality, otherwise 75%) of value; be a term of 10/25 (or 10/30, if really good quality); and, it will be underwritten at a 1.20 (depending upon quality, otherwise 1.25%) DSC. For hospitality, the interest rate spread would be in the area of 125 to 135; with LTV of 75%; and, DSC of 1.35. Another wrote: Q: I am writing an article for my blog. What index are they using to price their deals? One month LIBOR? Six month LIBOR? Swap spreads? A: 10 year Treasury mostly. Only Wells uses Swaps to my knowledge.... Q: Can you please give me an idea what rates conduits are quoting today for, say, an imaginary loan of $4MM? A: 110-160 BPS over 10 year treasury depending on property type and how strong the deal is.... Q: What would be range of margins be for each of the four major food groups and hospitality? A: Multifamily 110-130 Office 120-140 Industrial 115-150 Retail 110-130 Hospitality 120-160 Of course the spreads get smaller as the loans get larger......And if someone's securitization gets a haircut on Wall Street, then the spreads will rise. You can apply for a commercial real estate loan to 750 different commercial real estate lenders in just four minutes using C-Loans.com. |
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