What is Conduit Financing?
In apartment property investing, conduit financing typically refers to the use of conduit loans - also known as cmbs loans - to finance the acquisition of an apartment property.
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Conduit Financing in Apartment Property Investing
In the context of apartment property investing, conduit financing typically refers to the use of conduit loans - also known as CMBS loans - to finance the acquisition of an apartment asset. Much like with the general definition of conduit financing, cmbs loans involve the use of securitized, fixed-income investments, with the caveat that commercial real estate loans are used as collateral.
The collateralized loans are used to finance commercial properties such as residential apartment buildings, before being bundled together in a group of similar commercial mortgage loans. These larger groups are then packaged to be sold on a secondary market as secured bonds, categorized in what are known as tranches, organized by the level of risk involved.
Conduit financing is a good choice for borrowers with a lower net worth or who are looking to finance mixed-use properties. CMBS loans are also a great option for investors with credit or legal issues. Since CMBS financing is generally asset-focused, lenders are not as strict with borrower credit requirements and are more interested in the financial stability of the asset itself.
CMBS apartment loans are generally available with 10-year fixed-rate terms. Most of the time, they are non-recourse, and have a maximum LTV of 75%. In terms of prepayment, conduit loans often allow for defeasance, though yield maintenance can be an option in some cases.
Sample Apartment Conduit Financing Terms
- Loan Size: $2 million+
- Loan Term: Typically a 10-year fixed-rate (though other term lengths may be available)
- Amortization: 20-30 year
- Leverage: 75% Maximum LTV
- DSCR: Minimum 1.25x DSCR
- Debt Yield: Minimum 6.5% DY
- Recourse: Generally non-recourse with standard “bad boy” carve-outs
- Prepayment: Defeasance or yield maintenance