Wall Street started selling Freddie Mac and Fannie Mae residential mortgage backed securities (or “MBS”) in the mid 1970's. These MBS bonds were, and still are, a popular investment vehicle for many bond investors. Because of the enormous demand for capital stemming from the savings and loan crisis in the early 1990's, and the Resolution Trust Corporation's need to liquidate large holdings of commercial real estate mortgages, Wall Street created the Commercial Mortgage-Backed Securities market (or “CMBS”) in the mid 1990's. The originators of CMBS bonds are commonly referred to as “conduits.” These conduit lenders package several hundred loans and aggregate them into multi-billion dollar pools which are rated by a rating agency and sold as bonds on Wall Street, primarily to institutional bond investors. The bonds are separated into different risk levels, called traunches, which allow bond investors of differing risk averseness to invest in the CMBS market. The bond investor taking the most risk (buying the lowest rated traunch) is called the “B Piece Buyer.”

Nearly 15 years ago, total CMBS volume was approximately $10 billion. Today, that volume exceeds $200 billion.

One of the advantages of CMBS financing is that Wall Street provides a very efficient marketplace for borrowing funds and, hence, a very real-time look at market interest rates and financing terms. Also, the CMBS marketplace is so large and so competitive that it can truly be said that conduits can offer the ABSOLUTE best interest rate available in the marketplace at a given moment in time.

Because CMBS bonds are so attractive to bond buyers today, conduits can push the envelope with respect to loan terms and interest rates - so long as those terms can be sold on Wall Street. Most recently, conduits have been able to stretch amortization terms and lower debt coverage requirements, both of which result in higher loan amounts.

Conduits are cash flow lenders. They underwrite based upon the reliability of proven cash flow generated by a particular property. Because of this, not every loan is a conduit loan. Furthermore, because the CMBS industry is regulated by Real Estate Mortgage Investment Conduit (REMIC) laws, there will inevitably be certain aspects of some properties or loan requests which simply do not fit into the conduit “mold.”

Advantages to Conduit Lending

• Conduits are able to offer maximum leverage, usually up to 80% LTV.
• Conduits are able to offer maximum amortization, sometimes with interest-only periods.
• Conduits are able to offer very attractive interest rates, and forward rate locks up to 18 months.
• On more conservative loan requests, conduits have the ability to waive reserves for tenant improvements and leasing commissions (if applicable), and sometime taxes and insurance impounds as well.

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