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CMBS works because of the ‘locked out’ nature of the underlying loans. The ultimate investors in CMBS are able to rely on a certain return on its investments for performing loans and therefore, pay a higher price than a bond with uncertain returns. That is why it is very prohibitive to pay off a CMBS loan ahead of its term. Most CMBS loan documents require (a) the loan be defeased, or (b) the loan to be assumed. 

Defeasance provides a way for the current owner to sell the property and yet pay the CMBS investors the same amount of return as if the loan were in place. I don’t want to devote time in this article explaining the details of defeasance, but the bottom line is that when interest rates are low (which they clearly are now), defeasance is usually too expensive of an option. That means that one of the most likely ways a sales transaction will get done in CMBS is when the buyer assumes the existing loan. This is a common scenario but COVID has introduced new questions into the process. These include:

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