The Capital Markets

CHAPTER 20Commercial Mortgage‐Backed Securities (CMBSs)

Daniel I. Castro, Jr.

OVERVIEW OF COMMERCIAL MORTGAGE‐BACKED SECURITIES

Commercial mortgage‐backed securities (CMBSs) are bonds where the payment stream to the holder is funded by the payment of principal and interest on an underlying pool of commercial mortgage loans. Typically, the loans serving as collateral for CMBS include loans for office buildings, apartment buildings, hotels, shopping centers, warehouses, health‐care facilities, industrial properties, and other commercial real property. The loans are generally 10‐year fixed‐rate term loans (5‐year and 7‐year maturities are less common) with a 30‐year amortization schedule that have a balloon payment due at maturity.

To create CMBSs, commercial mortgage loans of varying dollar amounts, property types, and geographic locations are pooled together and sold to a trust. The trust pays for the loans by issuing certificates backed by the assets held in the trust. These certificates are issued in different tranches or classes, with each tranche differing in yield (the amount of return on the certificates), maturity (the length of time before the certificate is expected to be paid off), and payment priority (the order in which investors are paid a return on their investment). Generally, principal will be paid from the top tranche down in sequential order, and any losses will be allocated to the securities at the bottom of the capital structure and working up the structure. ...