Buying a property encumbered by a conduit loan? Assume nothing.

I have a GREAT deal toy in my office. It is a bottle of Pepto-Bismol. It has an inscription: "Remind Me Again Why We're Doing a Conduit Loan Elixir." It is a reminder of the wringer a group of us went through doing a conduit loan for a regional mall some years ago. Why do people do this type of deal? You can, if the rates are right, save a bunch of money compared to traditional financing, and do much bigger deals as a rule.

(By the way, if you want to learn more about or more fully understand the nature of conduit loans and CMBS, try clicking here. This is at least a good start.)

Remember, because the holders of the CMBS bonds are expecting to clip coupons for the life of your loan, you can't prepay the deal. So, if you want to get rid of the loan for any reason (for instance, a sale), you have but two options. And the only things I can think of that are more painful than doing a conduit loan are (1) transferring that loan to a subsequent purchaser or (2) defeasing the loan. Tonight we'll discuss option (1). Option (2) deserves a section all its own another time. (Suffice it to say for now that it means substituting the collateral of the loan with enough US Treasuries to make all the loan payments.)

To make a short story long, I've had on more than one occasion the sheer joy and rapture of representing clients who were transferring or assuming conduit loans. So it was very interesting to read Kenny Pratt writing about this very topic today, if for no other reason than it makes you feel less alone. Whereas you saw a bunch of defeasances a few years ago because of low interest rates, I agree that you may well see more attempts to assign loans to take advantage of these locked-in rates. I feel sorry for the people involved in this deal, because you are at the lenders' mercy. I hope they are able to get the deal done more quickly, and I concur 100% with Kenny that there should be the ability to buy your way into premium service -- perhaps not unlike some companies in the defeasance business. (These people are my favorites.)

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