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Leveraged Breakdowns

CMBS Basics, Part One

Breaking down insider lingo is one of our chief strategies at Leveraged Breakdowns. Real estate private equity for beginners can seem daunting with acronyms and phrases that sound familiar, but until you know them inside and out, you won’t be able to interview like an insider. And interviewing like an insider is the key to starting your career in real estate private equity.

What is CMBS?

First, CMBS stands for Commercial Mortgage Backed Securities. The name is very descriptive: these are securities that are backed by commercial mortgages. The basic idea is to go out and make a whole bunch of commercial loans, package them up, and sell bonds to investors. The bond payments to investors are made by the loan payments received from the various borrowers, and the firms that put the whole thing together get fees and a little spread on the rates as compensation.

Can You See Why This Is An Entire Industry?

In order to make this system work, there have to be a number of checks and balances in place. You need underwriters that validate the creditworthiness of the borrowers and the value of the underlying real estate for each of the loans that will go into the pool. You need bridge lenders to fund the loans made, because the individual mortgage loans making up the pool won’t all close at the same time. You need ratings agencies to opine as to the quality of the pool of loans in order to assure investors that the bond returns promised are achievable. You need servicers to handle collection of the loan payments from borrowers, and then turn and make payments to the bond holders. You need special servicers to handle delinquencies, foreclosures or other credit-related workout situations. You need issuers to write and sell bonds that are backed by the loan pool (called “securitization”).


One of the important selling points with CMBS securitizations is tranching. “Tranche” is a French word that means “slice.” Most CMBS pools will be divided into two or three tranches, each with its own risk profile, and its own bond interest rate. The highest quality tranche is called the “A” note or the “A” Piece, carries the lowest risk of default, and therefore the lowest interest rate of the pool. Next is the “B” note or “B” piece, and sometimes there is a “C” piece. As you move down from “A” the risk of default is a little higher, as is the bond interest rate (to compensate investors for the added risk). This is structurally defined within the securitization documents, because if there are any defaults or missed payments within the pool, the “C” bondholders are in the first loss position. The “B” piece holders are next in line, and finally the “A” piece.

Starting your career in real estate private equity will require hard work and long hours. Investing the same time and energy into landing the job as you will once you have the job will shorten your job search. Spend your time wisely, learning as much as you can about the REPE business. Coursework from Leveraged Breakdowns will help you transition from a real estate private equity beginner to a real estate private equity pro!

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