CMBS Loans and Co-Working Spaces: What You Need to Know

In this article:

Should Potential CMBS Borrowers Rent to Co-Working Spaces?
Why Co-Working Spaces Present Risks to CMBS Borrowers
Related Questions
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Should Potential CMBS Borrowers Rent to Co-Working Spaces?

If you own one or more office properties, and you want to get CMBS financing in the near future, should you rent space to co-working companies like WeWork? The answer is complex; while co-working has been growing at a breakneck pace, with approximately 23% industry growth for the last several years, it still presents certain risks that landlords should consider.

Why Co-Working Spaces Present Risks to CMBS Borrowers

On paper, co-working spaces seem like fantastic tenants, and right now, the market is hot. However, since co-working spaces themselves are in the business of subleasing office space to tenants, usually on a short-term basis, the co-working business model carries with it an inherent instability.

In general, CMBS lenders aren’t opposed to co-working spaces, but in general, they prefer that co-working space occupies no more than 20-25% of an office property’s total square footage. This helps limit risk in the case that a co-working space’s clients don’t renew their leases, as that could affect the co-working space’s ability to pay rent to a potential CMBS borrower, increasing the chance of a potential loan default.

What are the benefits of CMBS loans for co-working spaces?

CMBS loans can provide the highest leverage loan a borrower can get for properties in secondary and tertiary markets. Additionally, CMBS lenders generally prefer that co-working space occupies no more than 20-25% of an office property’s total square footage, which helps limit risk in the case that a co-working space’s clients don’t renew their leases.

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What are the risks associated with CMBS loans for co-working spaces?

CMBS lenders prefer that co-working space occupies no more than 20-25% of an office property’s total square footage. This helps limit risk in the case that a co-working space’s clients don’t renew their leases, as that could affect the co-working space’s ability to pay rent to a potential CMBS borrower, increasing the chance of a potential loan default.

Disadvantages of CMBS financing include:

Not serviced by initial CMBS lender
Strict enforcement of prepayment penalties
Higher closing costs
Dishonest tranche ratings can have serious negative effects for borrowers and investors

What are the requirements for obtaining a CMBS loan for a co-working space?

In general, CMBS lenders prefer that co-working space occupies no more than 20-25% of an office property’s total square footage. Additionally, lenders look at two major metrics when deciding whether to approve a CMBS loan; DSCR and LTV. They also look at debt yield, a metric which is determined by taking the net operating income of a property and dividing it by the total loan amount. Lastly, lenders typically require a borrower to have a net worth of at least 25% of the entire loan amount, and a liquidity of at least 5% of the loan amount.

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What are the advantages of CMBS loans over traditional financing for co-working spaces?

CMBS loans offer several advantages over traditional financing for co-working spaces. These include:

Flexible underwriting guidelines
Fixed-rate financing
Fully assumable
Lenders and bondholders can potentially achieve a higher yield on investments
Investors can choose which tranche to purchase, allowing them to work within their own risk profiles

Additionally, CMBS loans typically have a lower loan-to-value ratio than traditional financing, which can help protect lenders from potential losses in the event of a loan default. This is especially important for co-working spaces, as their business model carries with it an inherent instability.

Source: CMBS Loans and Co-Working Spaces: What You Need to Know and CMBS loans in Apartment Investing

What are the best practices for managing a CMBS loan for a co-working space?

The best practices for managing a CMBS loan for a co-working space include limiting the co-working space to no more than 20-25% of the office property's total square footage, as well as ensuring that the co-working space's clients renew their leases. This helps limit the risk of a potential loan default in the case that the co-working space's clients don't renew their leases. Additionally, CMBS loans can be used for property acquisition, cash-out refinancing, and rate or term refinancing.