The CMBS Stress Test

It’s easy to say nobody was entirely prepared for the global pandemic that all but shut down the U.S. economy in March. But when it comes to sectors of commercial real estate that were especially vulnerable to COVID-19, the commercial mortgage-back securities market makes a compelling case for special attention. Representing roughly $490 billion of the $3.5 trillion in commercial real estate debt, according to the Mortgage Bankers Association, CMBS is a common financing avenue for CRE projects that, on the whole, offer non-recourse provisions, higher proceeds, and less stringent underwriting practices. Instead of a traditional bank loan, CMBS are securitized by the bond market, which provides these benefits. But such pros come with a few extra strings. One crucial characteristic of CMBS loans is that borrowers cannot, under any circumstances, add debt to an existing loan. CMBS loans are subject to oversight from the Securities and Exchange Commission and the Internal Revenue Service, meaning increased regulation and oversight. “CMBS loans are governed by an IRS vehicle called the REMIC, or real estate mortgage investment conduit, which allows every whole dollar from a borrower to pass through to bondholders without being taxed,” says Ann Hambly, founder and CEO of 1st Service Solutions, a firm specializing in CMBS borrower advocacy through loan restructures, assumptions, and equity and debt solutions. “The minute a performing loan is modified — by adding debt, for instance — the entire pool of bonds could become taxable.” Click to read more at