Life vs. Conduit

Learn more about our commercial real estate financing options.

Commercial real estate owners seeking financing have a wide array of lending options in today’s market, including life insurance companies, CMBS (conduits), banks, agencies, pension funds and private equity funds. As borrowers seek the most competitive permanent financing terms, life insurance companies and securitized lenders (CMBS) are most often viewed as the primary source of long term, fixed rate capital for income producing properties.


Commercial Mortgage Backed Security lenders (commonly referred to as CMBS and/or conduit lenders) are once again considered a competitive source for permanent financing. During 2007 CMBS production levels peaked with $230 billion in issuances. Once the recession hit, CMBS production levels dropped to $12 billion in 2008 and to a low of $3 billion in 2009. Ultimately CMBS lenders ceased financing operations totally as a result of market conditions. Over time, CMBS lenders have slowly reentered the market. While not at the production levels of 2005 to 2007, CMBS issuances for 2014 are estimated to reach $100 billion according to a recent report issued by the Mortgage Bankers Association.

CMBS execution is an attractive avenue for many borrowers, since the loans are typically non-recourse, fixed rate loans at maximum proceeds. Additionally, in recent months CMBS lenders have resumed offering interest only options, even on Class B assets; making them an aggressive lending source. In comparison to bank financing, CMBS loans are almost exclusively non-recourse and are typically for a term of 10 years.

With this method of finance, commercial loans are originated with the intent of being securitized. They are then pooled and transferred to a trust. The mortgages are held as collateral at the trust level and securitized. Rating agencies assign risk classes to the bonds. The bonds are transferred to the open market where they are sold to investors.

Life Insurance Companies
Life insurance companies have historically been the major source of non-recourse, long-term (10 years or greater), fixed rate financing. Many life companies are able to offer long term self-amortizing loan structures, in some instances up to 30 years. During the recession, life companies remained a source of debt, albeit at extremely conservative levels, as the CMBS market vanished and bank regulations became increasingly cumbersome.

Life company lenders, sometimes referred to as portfolio lenders, typically maintain the loans they fund on-book which means they are able to provide more flexibility to the borrower up front and during the loan term. Loans can be structured to accommodate such things as earn-outs, forwards and collateral releases. Recourse that burns-off can also be offered in the short term to mitigate upfront risks. Furthermore, Borrowers have the ability to lock the interest rate at application whereas with CMBS and bank loans the rate is locked prior to loan funding.

Overall, life companies tend to fund loans on a more conservative basis than conduits and banks. They are more discerning with their underwriting and the evaluation of sponsors and properties. The maximum leverage point is typically up to 70% for most loans, with the exception of multifamily and grocery anchored retail where 75% LTV is more typical. In an effort to increase competitiveness, some life companies are offering interest only options for loans leveraged at less than 55% LTV in major markets.

In summary, commercial real estate owners have numerous financing options today. However, life Insurance companies and CMBS lenders appear to be the primary source of long term permanent first mortgages. Borrowers are left to choose the lender and loan structure that is the most suitable to their needs. The Largo Group of Companies is a mortgage banker that provides commercial real estate financing for property owners throughout the United States and Canada.  Largo has been in business for 25 years and has closed in excess of $13 billion in commercial loans. We have 17 correspondent relationships, including life companies, conduits, agencies and banks that enable our company to provide its borrowers with the most competitive financing terms available.
By: William Vogel, Analyst, Largo Real Estate Advisors, Inc.


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