CRE Investor’s Guide to CMBS Loans
While commercial mortgage-backed securities (CMBS’s) only represent about 2% of the entire US fixed-income commercial real estate market, they are still a very appealing product for wealthy investors and those seeking high liquidity in the CRE market. Despite the fact that there is a certain amount of risk associated with CMBS’s, they are still considered less risky than a residential mortgage-backed security (RMBS), partly due to the fact that commercial mortgages are generally set for a fixed term, whereas residential mortgages are not. Here are some things to know about commercial mortgage-backed securities before investing.
Structure of a CMBS
The properties which are included in a CMBS are generally apartment complexes, shopping malls, factories, hotels, and office buildings, and a CMBS itself is comprised of commercial loans against these properties. These loans are grouped into categories called tranches, which are ranked from highest quality down to lowest quality.
Those at the upper end have less risk and tend to be the most profitable, whereas those at the lower end generally absorb most of the risk, and have a greater potential for losses. The stratification of tranches is an important mechanism for banks and lending institutions, because it allows them to create more loans to investors, while having a good understanding of the risks involved.
Participants in a CMBS
The commercial mortgage-backed security can be extremely complicated, and can include a whole range of participants who are involved in the commercial real estate market. Besides those people who actually invest in the CMBS, there are also usually a primary servicer, a master servicer, and a special servicer, all of whom are involved with the loans and payments.
There are also rating agencies, trustees, and a directing certificate holder who perform needed roles in CMBS administration. All of these individuals have a specific role in ensuring that the CMBS functions as intended. Since 2016, the potential for risk and losses has been somewhat reduced on CMBS’s, due to new regulations which have enforced margin requirements such as collateralized mortgage obligations.