Conduit Lending
The origination of commercial real estate loans specifically intended for securitization into CMBS (Commercial Mortgage-Backed Securities). Conduit lenders underwrite and fund loans, then pool them with other loans and sell the pool to investors as rated bonds. Conduit loans offer competitive rates, higher leverage, non-recourse execution, and assumability. Because loans are sold to investors rather than held on balance sheet, conduit lenders can offer terms that portfolio lenders cannot. However, conduit loans come with significant prepayment restrictions and less servicing flexibility than portfolio loans.
Related Terms
CMBS (Commercial Mortgage-Backed Securities)
Loans originated by conduit lenders that are pooled together and sold to investors as bonds. CMBS loans offer higher leverage (up to 75% LTV) with competitive rates across all property types. They feature standardized terms, non-recourse execution, and are assumable. However, they have significant prepayment restrictions (defeasance or yield maintenance) and less flexibility than portfolio loans.
Non-Recourse
A loan structure where the lender's remedies in case of default are limited to the collateral property, and the borrower has no personal liability for any deficiency. Non-recourse loans are standard for CMBS, life company, and agency lending. They typically include "bad boy" carve-outs that make the loan recourse for fraud, misrepresentation, or environmental issues.
Defeasance
A prepayment method where the borrower purchases a portfolio of government securities that generates cash flows matching the remaining loan payments. The securities are assigned to the lender, and the property is released from the mortgage. Defeasance is required for most CMBS loans and can be expensive, especially when interest rates rise.
Portfolio Loan
A commercial real estate loan that the originating lender holds on its own balance sheet rather than selling into the secondary market. Portfolio loans offer more flexibility than securitized products in terms of underwriting, prepayment, and loan modifications because the lender retains the decision-making authority. Banks, credit unions, and some life insurance companies are the primary portfolio lenders. Borrowers benefit from direct relationships with decision-makers and the ability to negotiate customized terms.
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