While CMBS has fallen out of popularity, it is still a great middle-ground debt solution for borrowers.
By Kelsi Maree Borland | June 03, 2019 at 04:00 AM
CMBS financing may have fallen out of popularity this cycle, but it remains a great middle-ground debt solution for borrowers. Mark Ritchie of Gantry describes CMBS as the goldilocks solutions, with balanced rates that can be appealing given the right terms.
“Here’s the Goldilocks metaphor. Borrowers need to explore their alternatives. There is a middle ground where CMBS provides the ‘just right’ debt capital solution. Today CMBS leverage and rates aren’t too high, nor are they ridiculously low,” Ritchie, a principal at Gantry, tells GlobeSt.com. “The right set of terms can be extremely appealing. Unfortunately for many borrowers a CMBS lending solution has become the loan of last choice, maybe for valid reasons due to a checkered past, however in its contemporary structure CMBS offers a compelling option for the demands of today’s equity.”
Specifically, CMBS is a good fit for urban and secondary and tertiary markets. These are often areas where other capital sources are less aggressive in pricing. “Even the top urban markets on the West and East coasts—think San Francisco, Los Angeles, New York City—can benefit from the ability of CMBS to provide an attractive funding solution,” says Ritchie. “With a 65% loan-to-value, 10-years interest only structure available, the right CMBS execution creates strong cash flow over the life cycle of asset ownership, which we have seen as a driving consideration in today’s market environment.”
CMBS financing has fallen out of popularity largely due to customer service post-closing. However, CMBS has a history of best practices, according to Ritchie. “The institutional discipline guiding CMBS underwriting today built on a legacy of best practices, including fine-tuning our approach to servicing,” he says. “The interest only elements appeal to current pursuits of strong cash-on-cash returns, however low leverage underscores the institutional discipline and commitment to performance from both borrower and lender. CMBS was born from distress and created headlines for an irrational market in 2007, however today’s version 2.0 offers a stronger self-discipline and stable alternative to other more traditional loan structures. CMBS in 2019 is breaking away from its difficult past.”
Because of the benefits, Gantry is an advocate for CMBS debt even today. “Gantry is a long-time servicer of both Life Company and CMBS debt with a mortgage portfolio of nearly $13 billion, so my team is well versed in a variety of capital structures,” says Ritchie. “We understand the challenges of and remedies for CMBS. Our people were pioneers in the CMBS universe and our involvement in the CMBS space now spans 25 years, beginning with our work with one of our correspondent life companies creating the first on-book CMBS program in the 1990’s and arranging financing for one of the first private Single Asset Single Borrower loans in 1995, where one funding source provided all debt tranches.”