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Generally, most commercial
bank loans allow for the insurance proceeds to be used to
rebuild under certain conditions.
With a securitized (CMBS)
conduit loan, the borrower is likely to be able to utilize the
insurance proceeds only if the damage is of a more moderate
level, usually 20% to 40% of the property's rebuild-able
value. The borrower must demonstrate that it is obligated to
rebuild under certain tenant leases to avoid the percentage
restrictions.
Standard
commercial mortgage loan documents for
conduit financing generally prohibit any subordinate or
secondary commercial financing. A borrower considering a
conduit loan, as opposed to a traditional commercial loan,
should consider the future needs of additional financing
requirements.
While secondary commercial financing
restrictions are often a downside for conduit financing, a
large upside exhibits with the flexibility for the borrower
to easily transfer their ownership interest in the property
to another party often without negative financial consequence. Thus, gaining broad popularity with commercial
real estate investors as a transfer of ownership option and
avoidance of estate taxes.
Another issue which the
borrower must consider carefully involves the borrower's
willingness to have the
conduit loan remain in place for the entire
loan term, usually 10 years.
With conduit financing, there
is a "lock-out period" during which no prepayment of the
conduit loan is permitted. This period is generally the period
between securitization and delivery to the capital markets.
Thereafter, until the last three or four months of the term,
when prepayment is fully permitted without penalty, the
conduit loan
may be prepaid only through a process known as defeasance.
The defeasance process
involves the purchase of securities, commercial mortgage backed
securities or other governmental securities. The securities
are, in effect, substituted for the mortgaged property as
the collateral for the conduit loan, hence the name used often as a
"swap." The securities which are purchased have staggered
maturities to coincide with the monthly payment dates under
the commercial real
estate loan.
While conduit financing can be
a very good option, each borrower's circumstances are
different and there is no single type of
commercial mortgage
financing that meets everyone's needs. CommercialBanc
encourages borrowers interested in conduit loan
programs to contact us at 1-866-706-BANC for further
information.
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