Loans > Commercial Financing and Waterfalls in Commercial Mortgage Backed Securities
Commercial Financing and Waterfalls in Commercial Mortgage Backed Securities
Waterfall Determines Which Investor in a Commercial Mortgage Backed
Security Gets Paid First
commercial mortgage loans are securitized, they are assigned to a
trust that assembles these commercial loans into a large pool of
around $1 billion. The trust then sells bonds backed by the commercial
loans in this pool.
not every investor (bond buyer) gets the same yield. A nervous insurance
company may be willing to accept a much lower yield in return for
the right to be the very first lender to receive his principal and
interest in the event of a shortfall. This Nervous Nellie insurance
company may buy some of the AAA-rated bonds (the lowest risk "tranche").
more aggressive bank may be willing to take more risk in return for
a higher yield. This bank may buy some of the AA-rated bonds and
would be second in line to be paid in the event of a shortfall.
process continues until only the very risky "B-piece" remains.
The bonds in the B-piece tranche are typically unrated, but they
may offer a yield as high as 16% to 20%! Of course, if there are
any losses in the pool, the first class of bonds to take the hit
will be B-piece.
procedure that describes which investor gets paid all of his principal
and interest first, and then who gets paid second, third, fourth, etc.,
if there is any money left over, is known as the waterfall.
waterfall can get quite convuluted in a structured financing deal where
there is a mezzanine loan and some preferred equity behind a conduit
(CMBS) loan. The rents come in from the property, and the first lender
to be paid will be the conduit first mortgage.
the mezzanine loan piece might get paid a coupon rate of 10%. Next
the preferred equity holders may be paid a 12% coupon, and then the
owners may be paid up to 8% on their original downpayment, and finally
any excess may be paid to the mezzanine loan lender.
waterfall is the provision in the Intercreditor Agreement that details
where the payments go.
addition to permanent lenders, you can find numerous mezzanine lenders
on C-Loans.com: C-Loans
Commercial Mortgage Lender Databank