What Type of Commercial Financing is Right for Me?

With interest rates rising and speculation of a cool down in the real estate market, many borrowers are asking, “What type of commercial financing is right for me?” Increased demand for competitive interest rates has led to the creation of conduit loans. Although conduit loans are not extremely new, many borrowers are still unaware that they exist and/or do not understand the difference between portfolio loans vs. conduit loans. A few simple explanations can clear any misunderstanding and help any borrower find the right commercial loan for their real estate financing needs.There are two basic classifications that cover commercial real estate mortgage debt: portfolio loans and commercial mortgage backed securities (CMBS or conduit loans). Portfolio loans are originated by the lender and then held on their balance sheet for the entire life of the loan. CMBS or conduit loans are single loans that are combined together with other loans that have different property types, loan amounts, interest rates, locations, etc… and are held in a trust. These loans are then converted into bonds and sold on Wall Street with varying durations and yields depending on the bond rating they are given.Conduit loans have become a popular source of financing in the commercial mortgage industry because the securities are able to attract investors because their added value. Typically, the value of the security is more than the sum of the loans in the security and they are extremely liquid. As a result, the loans are able to be priced more aggressively than portfolio loans. Although the interest rates are very competitive, conduit loans are traded as securities and therefore must follow different rules and regulations than portfolio loans. Investors who hold the bonds are willing to pay more for them because of their feature that will not allow them to be prepaid without replacing the investment with government securities that have a similar return.For investors that flip properties or only hold them for a few months while trying to maximize the cash flow of a property, conduit loans may not be the right solution. Conduit loans seem to be a better fit for someone who is looking to hold on to a property for an extended period of time, such as owner-user properties, or long-term investments. Portfolio loans will generally have lower prepayment penalties than conduit loans because portfolio lenders are more interested in building long-term relationships with their borrowers that will enable them to bring in their borrower’s business deposits and increase the amount of loans that they are able to make.In every financing situation, it is always good to understand what your long-terms goals are and consider the pros and cons to both portfolio and conduit lending.