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A conduit loan is a fixed-rate, non-recourse commercial real estate loan originated specifically to be pooled with other loans and sold to investors as commercial mortgage-backed securities (CMBS). The lender originating the loan acts as a "conduit" between the borrower and the bond market. Conduit loans typically start at $2 million, carry 5- to 10-year fixed terms with 25- to 30-year amortization, and are available for most stabilized, income-producing property types. For brokers, conduit loans are a core product for clients who need fixed-rate financing, want non-recourse terms, and have stabilized assets that meet standard underwriting thresholds.
How Conduit Loans Work
The conduit loan process has a distinct lifecycle that separates it from traditional bank lending.
A conduit lender (usually an investment bank, a specialized CMBS lending desk, or a correspondent lender) originates the loan. The lender underwrites the property, closes the loan, and then holds it on its warehouse line temporarily. Once the lender has accumulated enough loans, typically $500 million to $1 billion or more in aggregate, the pool is transferred to a trust. The trust issues bonds (CMBS) backed by the cash flows from all the pooled loans, and those bonds are sold to institutional investors.
The borrower's monthly payments flow through a master servicer to the bondholders. If the loan performs normally, the borrower's experience is straightforward: make payments, maintain the property, comply with reporting requirements. If the loan defaults or faces a material issue, it gets transferred to a special servicer who handles workouts, modifications, or foreclosure.
Conduit Loan vs. CMBS Loan
Brokers and borrowers often use "conduit loan" and "CMBS loan" as synonyms, and in most conversations that is fine. The distinction is technical: "conduit" describes the origination channel (the loan passes through a conduit to the bond market), while "CMBS" describes the end product (the securities created from the pooled loans). A conduit loan becomes a CMBS loan once it is securitized. Before securitization, it sits on the lender's warehouse line. After securitization, it is part of a CMBS trust.
For practical purposes, the terms, rates, and underwriting are identical. If a borrower asks about a "conduit loan" or a "CMBS loan," they are asking about the same product.
Typical Conduit Loan Terms
| Parameter | Typical Range |
|---|---|
| Loan amount | $2 million and up (no firm ceiling, but most fall between $2 million and $50 million) |
| Term | 5, 7, or 10 years (10-year is most common) |
| Amortization | 25 or 30 years (some interest-only periods available for strong deals) |
| Interest rate | Fixed, based on a spread over the comparable U.S. Treasury rate |
| Maximum loan-to-value (LTV) | 65% to 75% |
| Minimum DSCR | 1.25x (some lenders require 1.30x for certain property types) |
| Minimum debt yield | Typically 8% to 10% |
| Recourse | Non-recourse with standard carve-outs |
| Prepayment | Defeasance or yield maintenance |
| Closing timeline | 60 to 90 days |
When Conduit Loans Make Sense
Conduit loans are not the right fit for every deal. They work best in specific scenarios.
They are ideal for stabilized properties with predictable income, borrowers who want long-term fixed rates without personal guarantees, and deals where the borrower plans to hold through the full loan term (since prepayment is expensive). A 200-unit apartment complex with 95% occupancy, a 10-year hold plan, and an LTV under 70% is a textbook conduit loan candidate.
They are a poor fit for properties in transition (value-add, lease-up, renovation), borrowers who may need to sell or refinance before the term expires, deals under $2 million, and properties with significant deferred maintenance or environmental concerns. For those situations, a bridge loan, bank loan, or other product is usually more appropriate.
Conduit Loan Underwriting
Conduit lenders underwrite to the property's cash flow, not the borrower's personal financials. The key metrics are DSCR, LTV, and debt yield. The property must demonstrate consistent income, and the lender will order a third-party appraisal, environmental report, property condition assessment, and title work.
One thing brokers should understand: conduit lenders underwrite to a "stressed" or "in-place" NOI, not a pro forma. Lenders typically apply their own vacancy assumptions, management fee adjustments, and reserve requirements regardless of what the borrower's financials show. The gap between the borrower's NOI projection and the lender's underwritten NOI is where many deals lose proceeds.
Borrowers also need to hold the property through a special purpose entity (SPE), which is a single-asset, bankruptcy-remote LLC. This is a securitization requirement, not a lender preference.
Prepayment on Conduit Loans
This is where conduit loans differ most from bank loans. Because the loan's cash flows are pledged to bondholders, the borrower cannot simply pay off the loan early without compensating those investors.
The two standard structures are defeasance and yield maintenance. Defeasance involves purchasing a portfolio of U.S. Treasury securities that replicates the remaining loan payment stream, effectively substituting collateral while the loan continues to exist. Yield maintenance requires paying a lump sum equal to the present value of the interest the lender (and by extension, the bondholders) would forfeit due to early payoff.
Both can be expensive, particularly when interest rates have fallen since origination. Borrowers and brokers need to model prepayment costs before closing a conduit loan to avoid surprises during a future sale or refinance.
Conduit Loans vs. Other Financing Options
| Feature | Conduit/CMBS | Bank Loan | Agency (Fannie/Freddie) |
|---|---|---|---|
| Recourse | Non-recourse | Usually full recourse | Non-recourse |
| Rate type | Fixed | Fixed or floating | Fixed |
| Property types | Most commercial | Most commercial | Multifamily only |
| Minimum loan | ~$2 million | No firm minimum | ~$1 million (small balance) |
| Prepayment flexibility | Low (defeasance/yield maintenance) | Higher (often step-down or no penalty) | Moderate (yield maintenance or declining) |
| Closing speed | 60-90 days | 30-60 days | 45-75 days |
| Relationship factor | Low (underwrite to property) | High (borrower relationship matters) | Low to moderate |
What Brokers Should Know About Conduit Loans
When presenting a conduit loan to a client, set expectations early on two fronts: prepayment restrictions and servicing. Conduit borrowers do not have a relationship banker they can call. Once the loan is securitized, the master servicer handles administration, and any requests outside normal operations (assumptions, modifications, partial releases) require servicer consent, which can be slow and costly.
The upside is significant: fixed rates, non-recourse terms, and the ability to finance property types and deal sizes that agency lenders will not touch. For a client with a stabilized office, retail, or hospitality asset who plans to hold for the full term, a conduit loan is often the most competitive option available.
When sourcing conduit lenders for a deal, focus on the spread over Treasuries, the lender's underwriting assumptions (their vacancy and management fee adjustments), and whether the loan offers any interest-only period. These three factors drive the net difference between competing term sheets more than anything else.
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Try Janover Pro →This content is for informational and educational purposes only and does not constitute financial, legal, tax, or investment advice. Janover Pro is a technology platform that connects commercial mortgage brokers with lenders. Janover Pro is not a lender and does not make lending decisions. Loan terms, rates, eligibility, and availability are determined by individual lenders and are subject to change without notice. Consult qualified financial and legal professionals before making financing decisions.
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