Get Flexible CMBS Financing for Your Industrial Property
CMBS loans are ideal for industrial property financing due to their high leverage and the fact that they’re non-recourse. In Q3 2021 alone, a record-breaking 137.9 million square feet of industrial product was leased in the United States, with vacancy rates hitting a low of 4.3%.
In addition, CMBS loans offer low, fixed-rate terms, and are available for a wide variety of multifamily property types. CMBS loans are also fully assumable with servicer approval, which can allow owners to avoid potentially heavy prepayment penalties when they sell their property. Interest-only options may also be available for qualified borrowers.
Common Uses for CMBS Industrial Loans
Acquiring new assets: With the industrial market looking incredibly strong, investors are looking to increase their holdings in the industrial sector, particularly in areas of high demand. These include
Refinancing existing debt: Whether you’ve taken out a high-interest bank loan, hard money loan, bridge loan, or are currently saddled with high-interest construction debt, a CMBS refinance can be a great way to reduce your monthly expenses and increase your property’s NOI (net operating income).
Take cash out: CMBS and conduit loans also allow for cash-out, which can be used to upgrade an industrial property to increase rents, or to expand an investor’s portfolio to other properties or investments.
Eligible Industrial Property Types for CMBS Loans
General-purpose warehouses: General purpose warehouses are used for goods that may not necessarily be distributed within a short time frame. For these warehouses, location is less important than use. Dry food storage facilities are one example of general-purpose warehouse space.
Storage and distribution: Storage and distribution centers involve storing goods and sending them to customers, whether individuals or businesses. These centers often have some degree of office space, typically 10-20%. Large companies like Amazon utilize storage and distribution centers across the country in order to efficiently and quickly distribute goods to customers.
Truck Terminals: Unlike general-purpose warehouses or storage and distribution centers, truck terminals are completely focused on transportation. They often serve as a link between production and distribution facilities and require relatively little storage space.
Light assembly: Light assembly facilities are used to assemble goods from smaller parts. They are generally significantly smaller than heavy manufacturing facilities and can be more easily configured to meet the needs of new tenants.
Heavy manufacturing: Heavy manufacturing facilities are generally quite large, often reaching hundreds or thousands of square feet. They often require three-phase electrical power for heavy equipment manufacturing, as well as trucking space. These buildings tend to be heavily customized for clients due to equipment needs, so it can be expensive and time-consuming to convert these facilities for new tenants. Car, tractor, ship, and large construction equipment manufacturing are some of the common uses for heavy manufacturing centers.
Cold storage and refrigeration: Cold storage and refrigeration centers generally are used for food processing, particularly for perishable goods. Common uses include fruit and vegetable packing centers, meat processing plans, and canning facilities. These facilities generally tend to need large walk-in refrigerators, freezers, or both.
Flex space: Flex space is generally defined as a combination of office and industrial space, with office space often consisting of one-third or more of the entire property. This may be common for engineering firms or biomedical firms that combine office research with R&D or manufacturing.
R&D facilities: Research and development facilities are similar to flex space. These are often used by car and tech companies to test out new products and are sometimes quite large. These properties may need to be built-to-suit for customized uses.
Data centers: At an average of about 100,000 square feet, data centers can be incredibly large. These facilities are generally used for cloud computing or IT purposes, but, as of recent years, may also be used for more exotic purposes, such as cryptocurrency mining.
Showrooms: Showrooms, which include car dealerships, generally combine warehouse space, offices, and the showrooms themselves. Other common types of showrooms could be large furniture stores, and boat, motorcycle, or RV dealerships.
Biotech and wet labs: Pharmaceutical and chemical companies often need highly specialized facilities in which to test drugs, chemicals, or other specialized materials. These buildings often need specialized ventilation, water distribution and plumbing, and temperature and humidity controls.
Soundstages: Soundstages are generally used for film and TV production. These buildings have high ceiling heights and generally have small office spaces. Soundstages are typically located in major cities and entertainment hubs such as New York, Los Angeles, or Atlanta.
Prospective Terms for CMBS Industrial 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: 75-80%/1.25-1.35x
Eligible Properties:
Triple-net (NNN) leases or absolute net leases are ideal
Assets in major MSAs are generally preferred
Staggered leases generally preferred, DSCR should not fall below 1.0x
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, per-unit 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