CMBS, Commercial Morgage Backed Securities

CMBS stands for Commercial Mortgage-Backed Securities, which are a type of investment vehicle that is backed by a pool of commercial real estate mortgages. The structure of CMBS can be quite complex, but in general, it involves a process of securitization, which means that the underlying loans are pooled together and sold as a single security to investors.

The structure of CMBS is typically broken down into several tranches or layers, each with its own level of risk and return. The highest-rated tranches are considered the least risky and have the lowest yields, while the lower-rated tranches are considered riskier and offer higher returns to compensate investors for the additional risk.

The structure of a typical CMBS transaction includes the following components:

1. Commercial mortgages: These are the underlying loans that are used to create the CMBS pool. They are typically originated by commercial lenders and secured by income-producing commercial properties, such as office buildings, hotels, and shopping centers.
2. Special purpose vehicle (SPV): The loans are then transferred to an SPV, which is a separate legal entity that holds the mortgages and issues the CMBS.
3. Tranches: The CMBS is divided into several tranches, each with its own credit rating and interest rate. The highest-rated tranches are the most senior, while the lower-rated tranches are the most junior.
4. Servicing: A servicer is responsible for collecting the mortgage payments from the borrowers and distributing them to the investors. They also manage the foreclosure process in the event of default.
5. Credit enhancements: To reduce the risk of default, CMBS transactions often include credit enhancements, such as reserve funds, excess spread, and overcollateralization.

Overall, the structure of CMBS allows investors to gain exposure to a diversified pool of commercial real estate loans while also offering varying levels of risk and return to meet their investment objectives.