Current status of CMBS offerings and key concerns

By Chen Xiuli, V&T Law Firm

Based on the core of policy “that housing is for residing, not for speculating”, real estate financing has become increasingly tighter. Given such advantages as long terms, relatively low financing costs, low repayments during the period, flexibility in the use of proceeds, etc., commercial mortgage-backed securities (CMBS) are increasingly drawing market attention.

Current offering status

Chen Xiuli
V&T Law Firm

CN-ABS data show that, as of 30 September 2021, a total of 212 CMBS products had successfully been sold in China, generating total proceeds of RMB453.6 billion (USD70.5 billion), with the number and size of offerings maintaining an annual growth trend since the first CMBS in 2016. Of those, 61 were sold in 2020, generating more than RMB120 billion in proceeds, and 52 have been made up to the end of the third quarter of 2021, generating approximately RMB87.5 billion in proceeds.

The types of underlying properties in the CMBS products sold are showing a trend towards greater diversity and continual increase. They mainly include hotels, apartment and office buildings, logistics warehouses, commercial complexes and infrastructure.

Key points of projects

Given that CMBS is a product in which one or more properties are mortgaged to create the underlying claims and which, through structural designing, then uses the future income derived from the corresponding properties as the main source of repayment, the selection of the underlying property and the choice of the transaction structure are the two most important focal points of this type of product.

(1) Selection of the underlying property – has final acceptance of the underlying property been completed and the immovable property registration certificate been secured? Regardless of whether required for the property mortgage or out of consideration for the cash flow generated by the underlying asset, final acceptance of the underlying property generally needs to have been completed, and the immovable property registration certificate secured. These are the basic prerequisites for mortgaging a property and putting it into use to generate cash flow. In certain special circumstances, it may be possible to communicate in advance with the regulator about certain properties that have already entered into use and are generating a stable cash flow, but for which the procedures for the immovable property registration certificates have not been carried due to special reasons, and to state the timeframe for carrying out the mortgage registrations.

Are there restrictions on the mortgage or transfer of the underlying property? Governments in different regions may impose certain mortgage or transfer restrictions on different types of land for various reasons, including economic development or area planning. For example, in one CMBS project, the underlying property was in a high-tech industrial park. The local government requires that the approval of the land grant authority be secured before mortgaging, and when mortgage rights are exercised, the land may not be sold by public auction. The government recovers the land and only pays compensation equivalent to the residual value of the buildings on the land for their remaining years.

In a number of other CMBS projects the land grant contracts for the underlying properties required approval before the granting of the commercial property or required the granting of the entire property. Fact finding on similar restrictions needs to be done in advance to determine whether they could impact the offering of a product.

What permissions and approval documents are needed for the normal operation of the underlying property. The operation of the underlying property usually requires that the requisite qualifications or permits be secured. For example, to operate a hotel, it is necessary to carry out the procedures for such permissions as a Public Premise Hygiene Permit, Food Operation Permit, Special Industry Permit, etc. To operate a paid parking lot, it is necessary to carry out the procedures for fee-charging permission. To erect outdoor advertisements, specific approvals are required.

(2) Selection of transaction structure. The dual and single special purpose vehicle (SPV) models are the most commonly seen CMBS transaction structures. The dual SPV model is where the original beneficiary entrusts a trust company to establish a single fund trust or property right trust, with the trust acting as the mortgagee. The plan manager then establishes a dedicated asset-backed plan to raise funds to purchase the right to benefit from the trust from the original beneficiary.

The single SPV model is where the original beneficiary directly extends a loan to the borrower and, after the plan manager establishes a dedicated asset-backed plan to raise funds to purchase the loan claims from the original beneficiary, the borrower mortgages the property assets directly in favour of the plan manager (representing the dedicated plan).

As no nested trust is required, the single SPV model presents such advantages as low financing costs, high financing efficiency and relatively simple operation. However, in practice, whether the single SPV model can be used depends on whether the underlying property can be mortgaged in favour of the plan manager.

Both natural persons and enterprises can act as mortgagees in carrying out immovable property mortgage-related procedures, according to the 2019 Guiding Opinions on Improving the Secondary Market for the Transfer, Leasing Out and Mortgage of Construction Land Use Rights issued by the State Council. However, there are still certain municipalities that can handle the registration only of immovable property mortgages where a China Banking and Insurance Regulatory Commission-approved financial institution, or a small-loan company approved by the competent provincial authority, is the mortgagee as the result of a lending relationship. Such areas are unable to register immovable property mortgages where the mortgagee is a securities company, fund subsidiary or other such plan manager.

Chen Xiuli is a partner at V&T Law Firm. She can be contacted on +86 755 8302 6455 or by email at