Get Flexible CMBS Financing for Offices and Mixed-Use Properties
While office buildings have been negatively impacted by the switch to remote work, office assets can still be highly profitable, particularly for Class A assets in major metropolitan areas such as New York or LA. In addition, some office buildings can be easily converted to retail, industrial, or even multifamily spaces, which may provide higher occupancy rates and more stable leasing conditions.
Just like for many other property types, CMBS loans can be a great option for office building financing, due to the fact that they’re non-recourse and officer fixed rates of between 5-10 years. Conduit loans are also fully assumable with servicer approval and a small fee, which can allow borrowers to avoid prepayment penalties if they want to sell their property before their loan matures.
Common Uses for CMBS Office Building Loans
Acquisitions: With office building prices at an all-time low, a CMBS loan could be a great way to acquire a low-cost asset. While remote work becomes increasingly popular, not every business can become remote. This is particularly the case for medical offices and companies that produce or deal with physical products.
Refinancing: If your office building has retained much of its value over the last few years, refinancing the asset could be a great way to obtain a lower interest rate, higher leverage, or better loan terms. This is particularly the case if you currently have higher interest bank or hard money financing that may be close to its maturity date.
Cash-out refinancing: If you have a lot of equity in your office building, some conduit lenders may be willing to offer you a cash-out refinance. As we touched on earlier, this can be used to slowly convert your office building to a mixed-use property by converting spaces to multifamily, retail, or even industrial spaces. Industrial conversions are generally best for large office parks in suburban areas, while multifamily or retail conversions are often best for buildings closer to a city’s central business district (CBD).
Eligible Office Property Types for CMBS Loans
Medical Offices and Hospitals: With U.S. healthcare needs constantly expanding, medical offices and hospitals are an ideal asset class for CMBS financing. Tenants may include individual private practices, outpatient clinics, or even medical equipment suppliers.
Mixed-Use Assets: Many offices are converting to mixed-use properties, and a CMBS loan could be the perfect fit to finance one.
Malls With Office Space: Traditional malls may be the trickiest CMBS asset to finance, due to low occupancy rates and high delinquency rates. However, CMBS lenders may still be interested in offering low leverage financing, as long as the borrower has a strong business plan and keep vacancy levels consistently low, which may involve leasing former retail space to office tenants.
Anchored Strip Malls: CMBS financing is generally available for anchored strip malls or shopping centers that combine office space with a strong core retail tenant, such as a regional or national grocery store or pharmacy.
Industrial Spaces: Properties that combine office and industrial space are also generally eligible for CMBS financing. This can include flex space, R&D, manufacturing facilities, shipping or distribution facilities, and even large car dealerships in some situations.
Prospective Terms for CMBS Office Building 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:
Properties must be fully stabilized Class A or Class B properties
Eligible property types include low-rise, high-rise, and office condos in central business districts (CBDs) and suburban areas
Single-tenant, multi-tenant leases permitted, triple net (NNN) and credit tenant lease properties preferred
Credit tenant lease properties or those which a major anchor tenant, the leases should extend past the CMBS loan’s maturity date
Staggered leases required for properties with multiple smaller tenants, DSCR should never go 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 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