Interest Rates on the Rise…Is now the Time to Lock into a CMBS Loan?
Article by, Brent Virkus – President and CEO of TRiTON Capital Advisory
Bernanke’s speech yesterday made it fairly clear that interest rates may be on the rise. Is now the time to refinance your commercial real estate loan? In our opinion, there never has been a better opportunity to lock into historically low rates. TRiTON has direct relationships with all of the most active CMBS non-recourse lenders and would welcome the opportunity to refinance your existing loan.
Most commercial loans are priced off of LIBOR so we thought we would let you see just how great rates are today. See the chart below:
Not sure What a CMBS Loan is?
Commercial real estate first mortgage debt is generally broken down into two basic categories: (1) loans to be securitized (“CMBS loans”) and (2) portfolio loans. Portfolio loans are originated by a leader and held on its balance sheet through maturity. In a CMBS transaction, many single mortgage loans of varying size, property type and location are pooled and transferred to a trust. The trust issues a series of bonds that may vary in yield, duration and payment priority. Nationally recognized rating agencies then assign credit ratings to the various bond classes ranging from investment grade (AAA/Aaa through BBB-/Baa3) to below investment grade (BB+/Ba1 through B-/B3) and an unrated class which is subordinate to the lowest rated bond class.
Investors choose which CMBS bonds to purchase based on the level of credit risk/yield/duration that they seek. Each month the interest received from all of the pooled loans is paid to the investors, starting with those investors holding the highest rated bonds, until all accrued interest on those bonds is paid. Then interest is paid to the holders of the next highest rated bonds and so on. The same thing occurs with principal as payments are received. This sequential payment structure is generally referred to as the “waterfall.” If there is a shortfall in contractual loan payments from the Borrowers or if the loan collateral is liquidated and does not generate sufficient proceeds to meet payments in all bond classes, the investors in the most subordinate bond class will incur a loss with further losses impacting more senior classes in reverse order of priority.
The typical structure for the securitization of commercial real estate loans is….