What Is A Conduit Loan?

Before stepping into any large-scale projects, you must know what is a conduit loan. Nowadays, you’ll find several types of loans offered by financial institutes. This includes mortgage loans, home equity loans, debt consolidation loans, and so on. Among these, conduit loan is not much well-known among people. So, today, I have decided to expose everything about what is a conduit loan. Here, CMBS loans are explained along with an example. Make sure you do not forget to check out conduit loans pros and cons. You can keep on reading further to get in-depth information on what is a conduit loan.

What Is A Conduit Loan?

A conduit loan is a commercial real estate loan that is pooled with other similar mortgages and sold on the secondary market. Conduit loans are also known as CMBS loans. Here, CMBS stands for Commercial mortgage-backed securities.

However, the following is the conduit lenders list which mostly includes large-scale projects.

  • Hospitals
  • Airports 
  • Industrial projects
  • Apartment buildings
  • Office buildings
  • Shopping centers
  • Housing projects
  • Public facilities 
  • Schools 
  • Docks
  • Sewage facilities

To know more about what is a conduit loan, continue reading.

Conduit Loan Features

Following are the key features of CMBS loans that must be noted.

  • Conduit loan rates are very competitive as they are based on U.S. Treasury rates or margin.
  • Here, the borrowers have to pay annulments in order to prepay their loans.
  • The term length of this loan is 5, 7, or 10 years. In rare cases, the term length can be of 15 years.
  • Conduit loans are always non-recourse. Basically, it means the borrowers are not liable for the repayment of the loan.
  • Only the cash flow is the sole source of repayment of the debt in case of foreclosure.
  • Borrowers can purchase bonds, Fannie Mae, or Freddie Mac securities to replace the income provided by their loan.
  • There are some CMBS loans that charge prepayment penalties on their borrowers.
  • The investors have to maintain the same yield until maturity.

After understanding conduit loan’s definition and features, let us find out how does this financing works.

How Does A Conduit Loan Work?

The working procedure of conduit loans is pretty simple. Here, I have explained the whole procedure using small, simple steps. 

  • In this financing, the institute or the person who receives the funds are known as conduit borrowers. 
  • These conduit borrowers are responsible for the interest and principal payments to the bondholders. 
  • Now, the debt finances and the cash flow obtained from the revenue-generating projects are used to pay the bondholders. It is first collected from the borrower by the conduit issuer and then given to the bondholders. 
  • However, the borrower must timely repay the interest and principal payments as per the written agreement.

You can keep on reading to know conduit loans commercial real estate risks and benefits.

Conduit Loan Pros And Cons

Every financing service available out there comes with certain pros and cons. Below, I have found out the risks and benefits of conduit transactions.

Pros Cons 
  • The profit gained on this bond is higher compared to traditional municipal bonds.
  • This bond is not backed by municipal assets or taxes.
  • Conduit bonds are not taxed at the federal level on interest income.
  • The investors need to clear on all details of the projects that are being financed.
  • It is easier for an investor to transfer ownership and minimize the risk in a conduit financing.

Conduit Loan Example

To understand this term even better, have a look at this example.

Consider a local non-profit hospital for an instance. This hospital wants to build a new maternity center. For this, they’ll use conduit financing to fund their project. Over here, the hospital will be responsible for replaying the debt finances not, the conduit issuer.

FAQ

How Does A CMBS Loan Work?

A CMBS loan usually works in the following way.

  • In this financing, the institute or the person who receives the funds are known as conduit borrowers. 
  • These conduit borrowers are responsible for the interest and principal payments to the bondholders. 
  • Now, the debt finances and the cash flow obtained from the revenue-generating projects are used to pay the bondholders. It is first collected from the borrower by the conduit issuer and then given to the bondholders. 
  • However, the borrower must timely repay the interest and principal payments as per the written agreement.

What Are CMBS Loans?

CMBS loans are fixed-income investment products that are backed by mortgages on commercial properties instead of residential real estate. While CMBS stands for Commercial mortgage-backed securities.

What Is A Secondary Market Conduit?

A Secondary market conduit is a commercial real estate loan that is pooled with other similar mortgages and sold on the secondary market. Then in the secondary market, conduit loans are classified into different groups depending upon risks, return, and loan maturity. It is also known as CMBS (Commercial mortgage-backed securities).

What Is A CRE CLO?

A CRE CLO is a CLO that is collateralized by CRE loans that are transitional.

Conclusion

In my above article, we have studied what is a conduit loan in detail. A conduit loan is defined as a commercial real estate loan that is pooled with other similar mortgages and sold on the secondary market. They are commonly known as CMBS loans. Mostly, they are used for the purchase of buildings, offices, shopping centers, and more. The interest rates of CMBS loans are very competitive as they are based on U.S. Treasury rates or margin. However, the term length of a conduit loan is 5, 7,10, or 15 years. Once you know what is a conduit loan, you are ready to step into the business world.