The Broker's Guide to CMBS Lending

CMBS (commercial mortgage-backed security) lending is one of the most important capital sources in commercial real estate. For brokers, understanding how conduit loans work, when they are the right fit, and where deals break down is fundamental to placing deals efficiently and advising borrowers accurately. This guide covers the mechanics, underwriting, deal structure, and practical considerations that brokers need to navigate CMBS lending.

How CMBS Lending Works

A CMBS loan starts like a conventional commercial mortgage: a borrower applies to a lender, the property is underwritten, and the loan closes. The difference is what happens after closing. The loan is pooled with other commercial mortgages, transferred to a trust, and securitized into bonds that are sold to investors in the capital markets.

The original lender (the conduit) is no longer involved after the loan is sold. Servicing is handled by a master servicer for performing loans and a special servicer for distressed loans. This structure has significant implications for borrowers and brokers, particularly around loan modifications, property management decisions, and prepayment.

For a broader look at how CMBS fits into the CRE loan product landscape, see the commercial loan products guide.

When CMBS Is the Right Fit

CMBS conduit lending works best for specific deal profiles. The ideal CMBS deal has the following characteristics:

• Stabilized, income-producing property with in-place cash flow
• Borrower seeking non-recourse financing
• Loan size of $5 million to $50 million (though smaller and larger deals are possible)
• Fixed-rate debt for 5, 7, or 10 years
• Borrower does not plan to sell, refinance, or materially alter the property during the loan term

CMBS is not the right product for value-add deals, transitional assets, construction, or any situation where the borrower needs flexibility. If the property is not stabilized or the business plan involves significant changes, bridge loans or bank financing are better options.

Deal Sizing and Underwriting

CMBS underwriting is driven by the property's in-place financials. Lenders use conservative assumptions and focus on the following metrics:

Debt Service Coverage Ratio (DSCR)

The minimum DSCR for most CMBS loans is 1.20x to 1.25x. Lenders underwrite using their own stressed NOI, which may be lower than the borrower's actual numbers. They apply vacancy reserves, management fee assumptions, and replacement reserves that can reduce the effective NOI used for sizing. Use the DSCR calculator to check your deal's coverage before approaching lenders.

Debt Yield

Debt yield (NOI divided by total loan amount) has become a primary underwriting metric for CMBS lenders. Most conduit lenders require a minimum debt yield of 8% to 10%, depending on the property type and market. Debt yield is independent of the interest rate, so it provides a more stable comparison across different loan structures. This is why many CMBS lenders will size a loan based on debt yield even if the DSCR is strong.

Loan-to-Value (LTV)

CMBS conduit loans typically offer up to 75% LTV, sometimes slightly higher for strong multifamily assets. The appraisal is ordered by the lender and must support the requested loan amount. In competitive markets, appraisals can sometimes come in below the borrower's expected value, which reduces the available loan proceeds.

Key Structural Features

Non-Recourse

CMBS loans are generally non-recourse, meaning the lender's recovery in the event of default is limited to the property itself. However, CMBS loans include carve-out guarantees (sometimes called "bad boy" guarantees) that create personal liability for specific actions like fraud, misrepresentation, voluntary bankruptcy, or unauthorized transfers. Borrowers and their counsel should review carve-outs carefully. For more on non-recourse structures, see the non-recourse financing guide.

Prepayment

CMBS loans typically use defeasance as the prepayment mechanism. Defeasance requires the borrower to purchase a portfolio of government securities that replicate the remaining loan payments. This is expensive and can cost hundreds of thousands of dollars depending on the remaining term and interest rate environment. Some CMBS loans offer yield maintenance as an alternative, which is similarly expensive. Brokers must communicate these costs clearly to borrowers before closing. If the borrower anticipates selling or refinancing before maturity, CMBS is likely not the right product.

Servicing

After securitization, the loan is serviced by third parties. A master servicer handles day-to-day administration. A special servicer gets involved if the loan becomes distressed or if the borrower requests a modification. Neither the originator nor the borrower has control over servicing decisions once the loan is securitized. This is a major difference from bank lending, where the borrower can call their relationship manager to discuss issues.

Reserves and Escrows

CMBS loans require monthly escrows for property taxes, insurance, and replacement reserves. Some loans also require TI/LC (tenant improvement and leasing commission) reserves for office and retail properties. These reserves reduce the borrower's available cash flow and should be factored into the deal economics.

The Closing Process

CMBS closings involve more parties and documentation than bank loans. The typical process includes:

1. Application and preliminary underwriting (1-2 weeks)
2. Term sheet issuance and acceptance
3. Third-party reports: appraisal, Phase I environmental, property condition report, seismic (if applicable), zoning report
4. Borrower background checks and financial verification
5. Loan document preparation and negotiation
6. Closing and funding (total timeline: 60-90 days)

Brokers should prepare borrowers for the volume of documentation and the pace of the process. Having a complete deal package ready at the outset, including rent rolls, trailing financials, property photos, and borrower financials, significantly reduces delays.

Common Mistakes Brokers Make

Submitting Unstabilized Deals

CMBS is for stabilized properties with in-place cash flow. If the borrower's business plan involves lease-up, renovation, or repositioning, the deal does not fit conduit lending. Submitting deals that do not qualify wastes time and damages credibility with lenders.

Ignoring Prepayment Costs

Brokers who do not explain defeasance or yield maintenance costs upfront create problems at the worst possible time. Borrowers who discover these costs late in the process may try to exit the deal or blame the broker for not disclosing the economics.

Underestimating the Timeline

CMBS loans do not close in two to three weeks. Brokers who promise fast closings based on bank timelines set unrealistic expectations. Build the 60-90 day timeline into the purchase agreement and communicate it to all parties.

Not Prepping for Servicing Realities

Borrowers who are accustomed to bank relationships are often surprised by the servicing structure of CMBS loans. Brokers should explain upfront that post-closing communication goes through servicers, not the originator, and that even routine requests can take time.

How Janover Pro Helps with CMBS Deals

Janover Pro connects brokers with CMBS conduit lenders who are actively quoting deals in the property type, geography, and loan size range that match the broker's deal. Instead of cold-calling conduit desks or relying on outdated contacts, brokers can identify active CMBS lenders, compare term sheets, and move deals forward faster. Schedule a demo to see how it works.

Frequently Asked Questions