CMBS Loans

CMBS underwriting is driven primarily by the property’s in-place income and cash flow rather than the sponsor’s overall financial strength. Because the loan will be securitized and sold to bond investors, lenders apply standardized underwriting criteria focused on debt service coverage, loan-to-value, and the quality and stability of the income stream. Properties with consistent occupancy, creditworthy tenants, and long remaining lease terms are evaluated more favorably than those with near-term rollover risk or volatile income.

Tenant quality and lease structure receive close scrutiny. A property leased to financially strong tenants under long-term agreements presents a very different risk profile than one dependent on shorter-term leases or tenants with weaker credit. CMBS lenders evaluate not just current occupancy but the durability of that occupancy over the loan term, which often spans five to ten years.

Borrowers should also understand the structural constraints that come with CMBS financing before committing. Prepayment is typically restricted through yield maintenance or defeasance provisions, which can make early payoff costly. Loan modifications require servicer approval and can be slow to process. For sponsors who anticipate needing flexibility during the loan term, a balance-sheet lender may be a better fit than CMBS regardless of pricing.