A type of commercial mortgage loan that is pooled with other similar commercial loans, and packaged/ securitized (by means of securitization) and sold to investors in the secondary market. The loans in the pool are held in trust to be used as collateral for the mortgage backed security (MBS).

The mortgage backed security is typically sliced into to tranches (each corresponds to its proportion/ level of risk, return and maturities). Tranching makes this instruments more appealing to various types of investors: lower risk investors (e.g., pension funds) tend to have the lowest exposure while higher risk investors (b-buyers) such as hedge funds tend to assume a higher level of risk. A conduit CMBS loan is structured as a commercial real estate loan on a non-recourse basis that bears a long term, fixed rate and is subject to specific, standardized underwriting and documentation requirements.

The fixed rates on theses loans are usually lower than commercial real estate loans extended by banks and similar financial institutions. Rates on conduit CMBS loans are determined based on the comparable on the run treasury rate plus a spread. The interest rate spread for conduit loans depends on multiple determinants/ factors mainly including property cash flows (as reflected in the ability of a property’s cash flow to cover monthly mortgage payments or the so-called DSCR), and other property related factors (property location, property quality grade, tenant quality, tenant bond grade, management, seasoning).

conduit CMBS loans are typically subject to prepayment penalties (defeasance and yield maintenance) that set them apart from other commercial loans. Defeasance allows the borrower to secure, from the market, substitute collateral. Yield maintenance is the present value of the difference between the conduit loan’s interest rate and the on the run Treasury rates with a time to maturity equal to the remaining yield maintenance term.

It is also known as a CMBS loan (commercial mortgage backed security loan).