There are many benefits to financing a commercial real estate
deal with CMBS. Traditionally, though, the ability to sidestep
retrading is not one of them. Indeed, retrading—the situation in
which a quote and terms are provided and then, at closing,
changed to reflect market conditions or new issues that may have
arisen during the underwriting—is considered one of the drawbacks to CMBS.
A More Flexible CMBS…
Now, though, we are dealing with a new brand of CMBS—one that
is more resilient, more cognizant of underwriting issues and more
aggressive in explaining the industry’s nuances to the Capitol.
One that is, as Scurtis noted, more flexible as well. In recent
months there has been a slow but steady emergence of floating-rate
CMBS, some observers interviewed for this article noted. “It is still
in its infancy right now, but this is definitely something we are see-
ing now,” Kelly M. Wrenn, a partner at Ballard Spahr LLP, based in
Washington, DC, says.
Another new trend, at least for 2013, has been the emergence of
interest-only CMBS loans, David Kessler, director of the firm’s
national commercial real estate practice and co-managing partner
of CohnReznick’s Bethesda office, says.
We are also dealing with a new environment, one in which investors are still eager for yields and economic and industry fundamentals are improving.
….But Still Facing a Giant Question Mark
We don’t want to paint a completely unrealistic picture of CMBS,
though. In many respects the conduit market
is facing an uphill climb.
That lobbying campaign to explain the
industry to Capitol Hill? The battle’s only half
done. And for those eager investors? Rising
interest rates could change that dynamic
awfully quick. Ditto commercial real estate’s
currently favorable fundamentals.
Also, while floating-rate loans and IO
carve-outs may be making a reappearance,
CMBS has hardly shed its reputation for rigid
Many borrowers, if they have any choice at
all, will opt for another form of financing over
Steven McCraney, president and CEO of
McCraney Property Co., a West Palm Beach,
FL-based developer, knows full well the value
of having a robust conduit market: during the
depth of the recession, a CMBS loan kept the
company afloat. “Nothing else was available to
us and we had a very good profile as a borrower,” McCraney says.
Today the company finds a wealth of
choices available and is opting for more traditional capital.
“We are building a 500,000-square-foot
industrial project in Orlando, and we did look
at CMBS for construction financing,” he says.
“But we went with a traditional lender because
it provided greater flexibility.”
“Borrowers learned some hard lessons dur-
ing the recession about CMBS,” says Lydia
Stefanowicz, a New York-based partner at
Edwards Wildman Palmer.
“It is not like dealing with a local bank or
insurance company, where you can call and
talk with a point person if you are having
trouble or need a workout,” she says.
“Borrowers found a lot more forgiveness
with local banks than they did with CMBS,
which is why I think there is more reluctance
to go with CMBS unless there is no other
CMBS, though, has always been known for its
rigidity. Borrowers deal with it or not. More
worrisome for the space is the still giant ques-