Get Flexible CMBS Financing for Mixed-Use Properties
As multifamily development across the U.S. grows at a steady pace, mixed-use properties are becoming increasingly popular. If you’re an investor or developer looking to finance a mixed-use development, a CMBS loan could be a great option.
Developers and merchant builders like mixed-use developments, as they can more easily attract multifamily tenants due to the fact that they can often purchase essential products from a pharmacy or grocery store without even exiting their apartment complex. On the retail side, mixed-use developments are often considered less risky than traditional shopping centers, as they already have a built-in customer base.
Mixed-use developments come in a variety of shapes and sizes, from small properties with a convenience store and a few shops to massive apartment complexes that combine hundreds of units with spaces for multiple major retailers, restaurants, gyms, and a diverse array of other businesses.
Common Uses for CMBS Mixed-Use Property Loans
Property acquisitions: Whether you’re purchasing a brand-new, just leased-up property from a merchant builder or a well-established mixed-use development, CMBS financing can be a great choice, particularly due to the fact that it typically has lower net-worth and credit score requirements than other options, like bank financing. While agency loans from Fannie Mae can be a good choice, they have higher net worth and credit requirements, and often have strict limits on the amount of commercial space that a development can have.
Refinancing existing debt: If you currently own a mixed-use property with a loan that’s coming to the end of its maturity date, or a loan with terms you don’t like, such as high interest rates or hidden fees, a CMBS refinance could be the perfect option. Remember, CMBS loans are non-recourse, so taking on CMBS debt can greatly decrease your personal liability should you unintentionally default on your loan. CMBS loans also have amortizations of up to 30-years and often come with interest-only (I/O) options, so taking on CMBS debt can greatly reduce your monthly mortgage payments, significantly increasing the potential ROI and IRR of your project.
Taking cash-out: For borrowers with build-up equity in their mixed-use property, a CMBS loan could be a great way to tap into that unused capital. Investors and developers can utilize that capital in any way they like, including expanding their portfolio with new properties or even making value-add upgrades to their current properties in order to increase rents and overall project profitability. However, borrowers should be aware that major property upgrades are generally not allowed with CMBS financing, due to the details of the CMBS securitization process, as detailed in the borrower’s pooling and servicing agreement (PSA).
Prospective Terms for CMBS Mixed-Use Property Loans
Unlike bank loans or life insurance company loans for commercial properties, or Fannie Mae, Freddie Mac, and HUD multifamily financing for apartment properties, CMBS loans have relatively lenient borrower requirements.
CMBS terms and requirements typically include:
Loan Size: $2 million+, no maximum loan amount
Loan Terms: 5, 7, and 10-year fixed-rate terms, interest-only (I/O) financing available for well-qualified borrowers
Amortization: Generally 25-30 years
DSCR/LTV: 1.25x -1.35x, 75% LTV
Loan Pricing: Pricing based on current swap rate or relevant U.S. Treasury rate, LTV and DSCR, as well as asset quality, rate buydowns available in some situations
Loan Assumption: Fully assumable pursuant to master servicer approval and a fee, generally 1%
Prepayment: Yield maintenance or defeasance
Recourse: Generally non-recourse with standard bad-boy carve-outs for issues like fraud, embezzlement, or international bankruptcy
Third-Party Reports: Third-party reports are paid for by the borrower, and typically include:
Full appraisal
Phase 1 ESA (Environmental Assessment)
Property Condition Assessment (PCA) is often required
Rate locks: Available at loan commitment, 30-day rate locks may also be available with lender approval
Replacement Reserves: Typically required and paid for by borrower on a per-year basis, may be waived or reduced in some situations, particularly for Class A assets
Lender Legal Fees: Generally $15,000 for smaller loans, larger for larger loans
Origination Fees: Generally 1%, can be higher in some scenarios