“As I look back on the CMBS conduit loans we closed in 2012 and 2013 to date a clear pattern has emerged on what motivates small balance sponsors (loans in the $3-million to $20-million range) to close CMBS conduit loans as opposed to competing commercial loan products,” commented Jim Brett, head of underwriting at ValueXpress. “The overwhelming motivation has been the ability for sponsors to extract large cash-out loan proceeds from refinancing into a CMBS conduit loan.”
Looking at the data, of the $350 million in loans closed by ValueXpress, all but one was a refinance! From the set of refinanced loans by dollar amount, 80% provided cash-out proceeds to the sponsor in amounts ranging from $250,000 to $7.5 million. Of the remaining 20% of the loans, the primary driver for a CMBS conduit loan execution was some level of sponsor (but not property) distress. Approximately $50 million of loans refinanced borrowing entities out of a defensive bankruptcy. Typically, the prior lender had failed, and the note was sold to an investor that immediately called a non-monetary default and moved to foreclose. The borrower then filed for bankruptcy to protect ownership of the asset. The CMBS conduit loan refinanced the property out of bankruptcy.
“Our data suggest that intermediaries who want to successfully originate CMBS conduit loans in volume need to focus on the refinancing of low-leverage, income-producing commercial real estate in which the sponsor has identified a need to extract cash from the asset, typically for another investment,” notes Michael D. Sneden, Executive Vice President at ValueXpress. “These transactions are successful because our primary competitors in the small balance market — community banks — hate cash out and the cash-out proceeds help mask the higher costs to close a CMBS conduit loan and the negative perception of the prepayment burden as well.