A conduit loan is a commercial real estate mortgage that the lender originates with the specific intent of pooling it with other loans and selling it to bond investors as a commercial mortgage-backed security (CMBS). Because the loan is funded by the capital markets rather than a single bank’s balance sheet, borrowers get long-term fixed rates and non-recourse terms that are hard to match elsewhere. The tradeoff is rigidity: once your loan is inside a securitized trust, the flexibility you’d expect from a bank relationship is gone.
Most conduit loans start at $2 million, run for five to ten years, and cap out around 75% of the property’s value. They are built to fit neatly into a pool, which is why the terms are standardized and why the servicing, prepayment, and modification rules that come with them are so unforgiving.
Typical Terms
Conduit loans look similar from deal to deal because standardization is what makes securitization work. Expect the following shape:
- Loan size of $2 million minimum, with most deals falling between $2 million and $50 million.
- Loan-to-value up to 75% for most property types, sometimes 70% for riskier assets like hotels.
- Terms of five to ten years at a fixed interest rate.
- Amortization schedules of 25 to 30 years, with a balloon payment for the remaining balance at maturity.
- Non-recourse structure, subject to the carve-outs discussed below.
Underwriting increasingly leans on debt yield, which measures the property’s net operating income as a percentage of the total loan amount, rather than debt service coverage ratio alone. Thresholds vary by property type. Multifamily in a strong market may qualify at 8% to 9%. Office buildings often require 13% to 15%. Retail and industrial land in between, depending on tenant quality and lease terms.
What Closing Costs Look Like
Conduit loans are underwritten to securitization standards, so the third-party diligence package is heavier than what a local bank would order. Budget for at least three mandatory reports:
- A commercial appraisal, running from roughly $2,000 for a straightforward property to $10,000 or more for complex assets.
- A Property Condition Assessment (PCA), an engineering report typically costing $1,100 to $2,500.
- A Phase I Environmental Site Assessment (ESA), usually $1,800 to $6,500 depending on the property.
Those reports sit on top of legal fees, title insurance, and any lender-required reserves. The total closing bill runs substantially higher than on a conventional bank loan, and the borrower pays for the reports whether or not the deal closes. If underwriting kills the loan, those costs are sunk.
Who You Actually Deal With After Closing
Once your loan is placed into a CMBS trust, the entity that originated it steps out of the picture. Servicing splits between two parties operating under the trust’s Pooling and Servicing Agreement (PSA).
The Master Servicer
The Master Servicer handles routine work: collecting monthly payments, managing escrow, and distributing funds to the trust. Its discretion is very limited. The PSA governs almost every decision, so calling the Master Servicer to ask for an accommodation is generally a dead end.
The Special Servicer
If your loan defaults or you breach a material covenant, servicing transfers to the Special Servicer. Each PSA sets its own timeline and triggers for that transfer. The Special Servicer’s mandate is to maximize recovery for bondholders, and it earns workout and liquidation fees, meaning its financial incentive is tied to the resolution process itself. That can mean a modification, a foreclosure, or a note sale, and the borrower has far less leverage in those conversations than they would with a portfolio lender.
Servicing can also transfer between firms over the loan’s life, so the borrower’s point of contact can change more than once even when nothing is going wrong.
Non-Recourse and the Carve-Outs That Undo It
Conduit loans are marketed as non-recourse, meaning the lender’s claim on default is limited to the property. In practice, that protection has significant holes called “bad boy” carve-outs. Trigger one, and the entire loan can convert to full personal recourse against the guarantor.
The acts most commonly triggering full recourse liability include filing for voluntary bankruptcy and committing fraud or misrepresentation, such as submitting falsified financial statements. Unauthorized subordinate financing, where the borrower takes on additional debt against the property without lender approval, also strips away non-recourse protection.
Lenders have expanded carve-outs over time to catch operational failures that sound minor: missing a deadline to submit financial reports, failing to pay property taxes on time, or letting insurance coverage lapse. A borrower who assumed non-recourse meant they could hand back the keys may discover that a late tax payment or an insurance gap has made them personally liable for millions.
Not every trigger produces full liability. Some carve-outs create “springing recourse” that activates only on a specific event, and violating a financial covenant like dropping below a required DSCR threshold might make the guarantor responsible only for a portion of the balance rather than the whole thing. The guarantor agreement spells out which acts trigger full recourse and which trigger partial liability. Reading it carefully before signing is one of the most important steps in the entire closing process.
Prepayment: Why Exiting Early Is Expensive
One of the biggest surprises for conduit borrowers is the cost of paying off the loan early. CMBS conduit loans impose prepayment structures built to protect investor cash flows, not to give the borrower an easy exit.
Two mechanisms dominate. Yield maintenance requires the borrower to pay a lump sum equal to the present value of all remaining interest payments the investor would have received. When rates have fallen since origination, that calculation produces enormous penalties. Defeasance takes a different approach: instead of paying the loan off, the borrower buys a portfolio of government securities that replicates the remaining payment schedule. The original note stays in the trust, and the government securities replace the property as collateral. Both methods keep the investor’s expected return intact regardless of what the borrower does.
Defeasance is more common in CMBS deals because it avoids disrupting the securitized pool, but the process is complex, requires specialized consultants, and adds its own transaction costs. Most conduit loans also include a lockout period during the first two to three years where prepayment isn’t allowed at all, followed by a window where yield maintenance or defeasance applies, and sometimes a brief open prepayment window in the final months before maturity.
Why Loan Modifications Are So Difficult
Borrowers used to working with local banks are used to negotiating rate reductions or term extensions over the phone. Conduit loans don’t work that way, and the reason goes deeper than servicer inflexibility.
The trust holding the loans is typically structured as a Real Estate Mortgage Investment Conduit (REMIC), a federal tax designation that lets the trust avoid entity-level taxation. Keeping that status requires ongoing compliance, including annual filings with the IRS on Form 1066.1eCFR. 26 CFR 1.860F-4 – REMIC Reporting Requirements and Other Administrative Rules Under federal tax rules, if a loan held by a REMIC undergoes a “significant modification,” the IRS treats it as if the old loan was disposed of and a brand-new loan was contributed to the trust. That can trigger a 100% prohibited transactions tax on any gain or post-modification income, or cost the REMIC its tax-exempt status entirely. Servicers approach any modification request with extreme caution as a result.
Certain modifications are permitted, including changes to collateral, guarantees, or the recourse nature of the loan, provided the obligation remains “principally secured” by real property. The loan meets that test if the real property collateral is worth at least 80% of the loan balance, or if the post-modification collateral value is no less than the pre-modification value. Modifications made in connection with a “reasonably foreseeable default” get a safe harbor from IRS challenge if the principally-secured test is met. The default doesn’t need to be imminent; the servicer needs a documented, good-faith assessment that the borrower faces a genuine risk of default.
Even where the tax rules permit a change, the PSA may independently restrict it. The Master Servicer often cannot modify a loan at all before a formal transfer sends it to the Special Servicer. The layering of tax constraints on top of contractual restrictions is what makes conduit workouts so much slower and less forgiving than conventional bank restructurings. The trust itself also has SEC reporting obligations that shape how servicers document what they do.2U.S. Securities and Exchange Commission. Asset-Backed Securities
When a Conduit Loan Makes Sense
The trade a conduit loan asks a borrower to make is a lower fixed rate and long-term non-recourse financing in exchange for a rigid product with expensive early exits, near-impossible mid-life modifications, and personal-liability triggers hidden in the fine print.
That trade works well for a stabilized, well-leased property held by a borrower who plans to ride out the full loan term without selling or refinancing early. It works poorly for a borrower who may need to exit before maturity, who might need lender cooperation during a downturn, or who wants an ongoing relationship with a lender who can pick up the phone. If either of those describes your situation, a conventional bank loan or portfolio lender will usually serve you better even at a higher rate.
The single most important document at closing is the guarantor agreement. Read every carve-out, understand which triggers convert the loan to full recourse and which only trigger partial liability, and get comfortable with the prepayment schedule before you sign. Once the loan is inside a CMBS trust, the terms you agreed to are the terms you have.