A commercial mortgage-backed security (CMBS) is a bond backed by a pool of commercial real estate loans — office, retail, multifamily, hotel, industrial — structured as a Real Estate Mortgage Investment Conduit (REMIC) with multiple tranches rated by credit agencies.
CMBS (sometimes called 'conduit loans') are the dominant securitized financing vehicle for income-producing commercial real estate. A conduit lender originates commercial mortgages with the explicit intention of pooling and selling them into a CMBS trust. The trust is structured as a REMIC under IRC Section 860A-860G, which provides pass-through tax treatment — the trust itself pays no tax, passing income directly to certificate holders. CMBS structures pool 50–200+ commercial mortgages by geography and property type. The pool is tranched by credit rating: investment-grade senior bonds (AAA through BBB-) are sold to institutional investors; below-investment-grade 'B-piece' bonds are sold to specialized investors who perform deep due diligence on the underlying loans. The B-piece buyer takes the first-loss position and controls workout decisions on defaulted loans. For borrowers, CMBS loans (conduit loans) are characterized by: (1) typically lower rates than balance-sheet loans for qualifying properties; (2) strict prepayment structures (defeasance or yield maintenance — not simple prepayment); (3) lender is the trust, not an individual bank — modifications and workouts require special servicer approval, which can be slow. The CMBS market is tracked by commercial real estate data providers and the Commercial Real Estate Finance Council (crefc.org). The SEC regulates CMBS disclosure under Regulation AB. CMBS spreads over Treasuries are a key indicator of commercial real estate debt-market health. Widening CMBS spreads signal CRE market stress and make conduit financing less competitive versus portfolio lenders.
CMBS loans are originated for sale into a securitization pool; bank (portfolio) loans are held on the bank's balance sheet. CMBS loans typically offer lower rates and higher leverage for qualifying stabilized properties, but with stricter prepayment structures (defeasance/yield maintenance) and less flexibility for modifications. Banks can negotiate loan terms post-closing; CMBS trusts generally cannot.
Most stabilized, income-producing property types: multifamily (some overlap with agency programs), office, retail, industrial, hotel/hospitality, self-storage, and mixed-use. CMBS lenders focus on debt service coverage (DSCR typically 1.25x+) and loan-to-value (typically 65-75% LTV). Construction, ground-up development, and owner-occupied properties are generally not CMBS-eligible.
A Real Estate Mortgage Investment Conduit (REMIC) is a tax structure under IRC Section 860A-860G that allows a pool of mortgages to pass income through to investors without entity-level taxation. Most CMBS deals are structured as REMICs. The structure must hold substantially all assets in qualified mortgages and issue two or more classes of 'regular interests' (the bonds) and one 'residual interest.' See IRS Publication 938 for REMIC tax guidance.