Most conduit loans are structured to allow one or more assumptions. If the ability to have the loan assumed isn't disclosed in your original term sheet, you should ask for it. I have never had a lender increase the interest rate because I asked for this flexibility.
It seems like the assumption process should be relatively simple, especially if the property has gone up in value during the time it was held by the original borrower, and especially if the NOI of the property has increased since the loans inception, allowing for greater debt service coverage. Unfortunately its not.
I'm currently working on selling one of our portfolio properties, and the buyer is trying to assume our loan. The process is fairly simple, but the time line is much longer than I would have imagined. The lender requires 45-60 days from the time they receive your non-refundable deposit, and your application, including the requested information about the proposed borrower. So in reality, your time to close is more likely to be 75-95 days because the buyer will need some time to put together the information the lender will require, and the buyer will likely want to do some due diligence before paying the non-refundable deposit to the lender. I know I would.
The process is drawn out and complicated for two reasons.
- There are three layers of approval that slow everything down.
Master Servicer: The first person you deal with is the Master Servicer. This is usually the same place you send you loan payments and the same people you work with if you are trying to get a refund from your impound account. They review the assumption package and write a case to be reviewed by the Special Servicer.
Special Servicer: The special servicer reviews the case presented by the Master Servicer. The special servicer has a higher level of authority and handles the more complicated matters like assumptions and prepayments (through defeasance or yield maintenance). After approval, they pass the case on to the Directing Certificate Holder.
Directing Certificate Holder: The directing certificate holder is the investor who purchased the riskiest or "first loss" piece of the securitized loan. They review the case and comments of the Master and Special Servicers and make the final determination regarding the approval of the assumption.
- Because the loan is securitized, the lender's underwriting of the assumption is much more in depth. You can see a detailed description of how the assumption of a Conduit or CMBS loan is underwritten here: Download CMBS World Article: Assumptions of Securitized Loans.pdf
. You can also find this article and several other articles written for borrowers of CMBS loans at the Commercial Mortgage Securities Association website.
The quick take-away is that Conduit or CMBS loans offer great rates and terms, but everything else about them from their initial underwriting, to assumptions, to pre-payments (through defeasance or yield maintenance) takes more time and effort than you think it will.
