Commercial Mortgage Backed Securities (CMBS) offer real estate investors and commercial lenders liquidity, which makes these kinds of securities an attractive option for investors. They are not, however, a standardized security, which means that it is important for all parties involved to limit their liability and carefully comply with securities and tax laws. Due to their unique structure and lack of standardization, you should be careful to hire an experienced securities lawyer if you choose to invest in CMBS. Through Priori’s curated, on-demand marketplace, you can connect with securities lawyers who have CMBS experience to help you make an educated investment.
Defining Commercial Mortgage Backed Securities
CMBS are a fixed-income security, typically in the form of a bond, which uses commercial real estate loans as collateral. They are generally issued by issued real estate investment corporations and commercial lenders. These types of securities are popular when real estate prices are appreciating.
How Commercial Mortgage Backed Securities Are Created
CMBS issues are usually structured as multiple tranches, similar to collateralized mortgage obligations. CMBS are created by pooling a range of commercial mortgages into a single investment instrument. This pool is then divided into tranches with different levels of risk as determined by rating agencies. Bonds are issued for each tranche, which investors can then choose to invest in based on their particular needs. You can select a CMBS tranche by duration, risk, expected yield and many other factors.
Potential Risks and Returns of Commercial Mortgage Backed Securities
CMBS can offer an attractive combination of risk and return potential for investors. While there always is the risk of default when investing in mortgage-backed loans, CMBS allow you to select the level of risk you want to take on through choosing the tranche in which you invest. It’s important to note, though, that historically CMBS are more volatile than residential mortgage-backed securities. Because of this risk, however, the returns can be extremely attractive compared to other bonds available. Specifically, CMBS can provide high yields relative to their duration when compared to other segments of the securities market.
The cost of CMBS can vary significantly, depending on a variety of factors. Priori lawyers can guide you through the investment from approximately $185 to $400 per hour. Priori clients enjoy a net-15% discount on standard hourly rates. In order to get a better sense of cost for your particular situation, put in a request to schedule a complimentary consultation and free price quote from one of our lawyers.
Are commercial mortgage backed securities liquid?
Generally, yes. CMBS trade on an active market with functioning new issue and secondary markets, especially now that they are again in high demand. Because they have been historically volatile, however, you cannot be guaranteed a level of liquidity as high as that offered by other investments.
Are commercial mortgage backed securities fixed-income investments or real estate investments?
CMBS straddle the two asset classes. CMBS are bonds backed by commercial real estate collateral, so they incorporate aspects of both fixed income, structured-products and individual real estate loans within an issuance.