The CMBS marketplace provides a
liquid, viable and transparent funding
method for larger real estate borrowers
and for a wide array of global fixed-income
investors. It has helped fuel the growth
and stability of the commercial real estate
market by providing attractively priced
loans for borrowers while providing
bond investors with lower-risk investment opportunities at attractive yields.
Whereas traditional CMBS are limited to
commercial properties, some nonbank
specialty-finance lenders issue bonds
collateralized by a mixture of assets consisting of both small-balance commercial
properties and residential investment
properties — like single-family residences,
townhomes, condominiums and small
apartment buildings — all with loan
amounts of less than $5 million.
For bond investors who purchase these
small-balance CMBS issuances, pooling
a large number of different mortgage
assets mitigates the risk of investing in a
single mortgage-asset class, and thereby
provides a more diversified investment
opportunity. It’s similar to the same
diversification strategy often recommended for stocks and mutual funds.
On the other side, small-balance
CMBS financing allows lenders to combine a pool of real estate assets that
otherwise might not be easy to trade.
By assembling a large portfolio of
less-liquid assets to back a CMBS issuance — including loans collateralized
by warehouses, mixed-use properties
and residential investment properties
— lenders can offer investors a more
diversified pool of assets.
Diversifying the underlying assets
combines the risk/return profiles of
different types of properties and makes
small-balance CMBS more marketable
to investors with varying appetites for
risk. When the issuers of small-balance
CMBS sell bonds in the financial markets,
they receive an infusion of capital that
can be used to originate more loans
and thus generate more income.
Some lenders are direct-portfolio lenders.
They include specialty-finance and
other nonbank lending institutions that
originate mortgages and finance their
portfolios of mortgage loans rather
than sell them in the secondary market.
A portfolio lender generates income
from origination fees and the spread
between the interest-earning funded
assets and the interest paid on the
underlying financing in their portfolios.
These types of lenders can create their
own lending parameters and guidelines to finance an underserved niche
or market segment that typically doesn’t
qualify for traditional bank loans.
The flexibility of their underwriting
process is key. It makes them an impor-
tant option for investors and mortgage
brokers looking to help their clients.
n n n
Mortgage brokers who can expand
outside of their comfort zones are finding commercial-property deals to be a
lucrative part of their overall business.
This is particularly the case because of
the strong economy and robust real
estate market that are driving demand
for property-financing options involving
residential-investment and small-balance
commercial properties. n
Scotsman Guide Commercial Edition | ScotsmanGuide.com | November 2018 53
“Diversifying the underlying assets combines the
risk/return profiles of different types of properties
and makes small-balance CMBS more marketable