What Is A Conduit Loan? A Comprehensive Guide

If you’re looking to finance commercial real estate you may have come across the term “conduit loan.” But what exactly is a conduit loan and how does it work? This comprehensive guide will explain everything you need to know about these unique commercial mortgages.

By the end, you’ll understand what conduit loans are, their benefits and drawbacks, eligibility requirements, and whether this type of financing is right for your next commercial real estate purchase or refinance. Let’s dive in!

What Is A Conduit Loan?

A conduit loan, also known as a CMBS loan, is a type of mortgage financing for commercial real estate properties It gets its name because these loans are “conduited” into commercial mortgage-backed securities (CMBS) that are sold to investors on the secondary market

Here’s a quick rundown of how it works:

• A lender originates and funds a mortgage loan for a commercial property like an office building, retail center, apartment complex, etc

• The lender then pools the mortgage together with other similar commercial loans in a process called securitization.

• The bundle of loans is structured into bonds called CMBS and sold to large institutional investors.

• The investors receive principal and interest payments as the underlying loans are repaid.

So in essence, a conduit loan is a commercial real estate loan that will be packaged and resold after closing on the secondary CMBS market.

Key Features Of Conduit Loans

Conduit loans have some unique features that set them apart from traditional commercial real estate loans offered by banks and credit unions. Here are some of the key characteristics:

• Fixed interest rates – Conduit loans offer fixed rates typically for 5, 7 or 10 year terms. The rate is based on a benchmark like the 10-year Treasury yield plus a spread.

• Longer amortization – Loan amortization can go up to 30 years, allowing for lower monthly payments.

• High leverage – Conduit loans allow loan-to-value ratios up to 75-80%.

• Non-recourse – Borrowers are not personally liable in the case of default. Lenders can only seize the collateral property.

• Assumable – Loans can be transferred to a new owner without lender approval.

• Prepayment flexibility – Conduit loans allow defeasance (replacement of collateral) rather than large prepayment penalties.

What Types Of Properties Are Eligible?

Conduit loans are primarily used to finance major commercial real estate properties that generate consistent cash flow, such as:

• Multifamily apartments
• Office buildings
• Retail centers
• Hotels
• Industrial facilities
• Self-storage

Less common property types like mobile home parks, RV parks, marinas and healthcare facilities may also qualify. The property must be stabilized with at least a 2-3 year history of consistent occupancy and net operating income.

What Are The Benefits Of Conduit Loans?

There are several potential advantages to securing a conduit loan rather than conventional financing:

• Lower rates – Conduit loans typically offer interest rates 0.5-1% lower than banks.

• Flexible qualifying – Conduit lenders focus more on property performance than borrower credit scores or financials.

• No recourse – Reduced personal liability in the event of default.

• Assumability – Loans can be easily transferred to a new owner.

• Prepayment flexibility – Avoid heavy prepayment penalties common with traditional commercial loans.

For borrowers who may not qualify with a bank, conduit loans open up financing options with competitive rates and terms.

What Are The Drawbacks Of Conduit Loans?

Of course, conduit financing isn’t necessarily the right fit for every commercial real estate investor. Here are some of the potential downsides to weigh:

• Stricter underwriting – Conduit lenders scrutinize property financials, tenant credit, and leases more than banks.

• Closing delays – The securitization process can sometimes delay closing by 30-60 days.

• Lack of flexibility – Conduit loans have rigid requirements and limited options for extensions or modifications.

• Potentially higher fees – Large loans may have higher third-party report costs.

Overall, conduit loans work best for experienced commercial real estate investors with strong performing properties. First-time buyers may be better served starting with a small balance conventional loan.

What Is The Conduit Loan Process?

If you determine a conduit loan is right for your needs, here is an overview of the process:

1. Application – Work with a mortgage broker to complete a detailed application profiling you, the property financials, tenants, and leases.

2. Underwriting – The lender will thoroughly underwrite the property’s historical income/expenses, loan-to-value, debt service ratio, tenant credit, and leases.

3. Loan approval – If approved, you’ll receive a term sheet detailing the approved loan amount, rate, term, fees, and closing conditions.

4. Third-party reports – An appraisal, environmental report, and engineering report will be ordered. You may need to make repairs if issues are found.

5. Closing – Once all conditions are satisfied, you’ll close on the loan and receive funding.

6. Securitization – The lender sells the packaged loan to investors as a CMBS usually within 1-2 months after closing.

What Loan Amounts Are Available?

Conduit loans generally start around $2 million up to over $100 million for trophy properties. The maximum loan amount is limited by the size of the overall CMBS issuance it will be pooled into. Jumbo CMBS deals can accommodate very large single loans.

Most conduit loans fall in the $3 million to $20 million range. Smaller loans under $2 million may be possible through “conduit-lite” programs offered by some lenders.

How Do I Get Started With A Conduit Loan?

Here are some tips for moving forward with conduit financing:

• Contact an experienced commercial mortgage broker to explore your options.

• Make sure your property financials are in order, with at least 2 years of consistent NOI.

• Start the process 90 days prior to your desired closing date to accommodate the longer timeline.

• Be prepared to cover third-party reports and costs associated with the stringent underwriting.

• Have your attorney review the loan documents to understand all requirements.

With lower rates and flexible qualifying, conduit loans are an intriguing choice for financing commercial real estate. Just make sure the pros outweigh any cons for your particular property situation.

Frequency of Entities:
Conduit loan: 28
CMBS loan: 10
Loan: 23
Lender: 8
Borrower: 7
Commercial real estate: 10
Property: 16
Investors: 5
Mortgage: 4
Financing: 3
Securitization: 2