Get Flexible CMBS Financing for Retail and Mixed-Use Properties
If you’re looking for financing for a retail property, a CMBS loan could be a great fit. Despite the rise in e-commerce, in 2021, brick and mortar retail sales accounted for more than 84% of all retail sales in the U.S. This means that even with market changes, retail real estate can be a highly profitable investment.
CMBS loans are non-recourse and are fully assumable with a small fee and servicer approval, allowing owners to avoid prepayment penalties if they sell their property before the loan’s maturity date.
Common Uses for CMBS Retail Property Loans
Acquire new properties: CMBS loans can easily be used to acquire new retail properties, particularly those with strong cash flow and in prime locations.
Refinance existing debt: If you currently own a retail property with a high-interest bank or hard money loan, particularly if your loan has a high-interest rate, a CMBS loan could be a great way to refinance it. CMBS loans are typically fixed-rate and offer some of the lowest interest rates in the industry, so this could be an ideal way to increase your cash flow.
CMBS is particularly ideal for refinancing loans that are reaching the end of their maturity date, as you will typically be able to avoid prepayment penalties as long as you refinance within the last 90 days of your existing loan, though prepayment penalty waver rules vary significantly based on individual lenders and loan agreements.
Take cash out: CMBS loans often permit cash-out refinances for qualified borrowers, which can be ideal if you want to make value-add improvements to your property. Unfortunately, many CMBS pooling and servicing agreements (PSAs) prevent property upgrades, but this doesn’t mean you can’t use your cash to upgrade other properties in your portfolio, or even to acquire new properties.
Eligible Office Property Types for CMBS Loans
Anchored shopping centers and power centers: Anchored shopping centers and power centers are often among the easiest types of retail types to obtain financing for, particularly if they have a strong tenant with a double net (NN), triple net (NNN), or credit tenant lease (CTL). Strong tenants can include national retail brands like Walmart, Target, or CVS, as well as well-known regional grocery stores.
In contrast to anchored shopping centers, power centers are outdoor malls that contain at least three “big-box” stores, such as the aforementioned brands, as well as department stores like Macy’s or Kohl’s, which also make them a suitable candidate for CMBS financing.
In addition to anchored shopping centers and power centers, some strip malls may be eligible for CMBS loans, however, these generally need to have stronger cash flow, higher DSCR ratios, and higher profit margins than their larger cousins.
Mixed-use properties: Mixed-use properties generally combine multifamily units with retail, and sometimes, office space. Mixed-use properties are also a great candidate for CMBS financing, as the multifamily component may be seen to reduce the overall risk of the deal due to the consistently high demand for apartments nationwide. In addition, retail spaces connected to the property will have a built-in customer base, making it more likely that retail tenants will be successful and not as likely to default on their leases.
High-end malls: Malls have been in decline for the last decade, generally making them more difficult to finance than other property types, particularly due to the high default rate of CMBS loans issued to malls. However, newer malls in high-end areas in major MSAs, such as downtown Los Angeles or Miami have still been strong performers in recent years, which make them strong candidates for CMBS financing, albeit with somewhat more stringent loan standards than other property types.
Prospective Terms for CMBS Retail 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
Eligible Properties:
Anchor tenants with long-term leases generally preferred
Larger leases should ideally expire after the maturity date of the loan
Staggered leases are preferred for smaller tenants
DSCR should not fall below 1.0x for the life of the loan
Experienced property management is generally required
Properties must generally be located in high traffic urban or suburban areas
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