How does the rate-lock deposit work on a CMBS loan?

How the deposit interacts with execution risk

Deposit size: 2% to 3% of loan amount is standard for CMBS rate-lock; on a $20M loan, $400K to $600K. Deposit funded at rate-lock, typically 30 to 60 days before closing.

Break-fee exposure: if the deal does not close after rate-lock, the borrower owes the lender's hedge-break cost. On a $20M loan with a 100-bp swap-rate move against the lender, the break fee can be 5% to 8% of loan amount, substantially more than the deposit. The deposit is the floor of borrower exposure, not the ceiling.

What can cause a CMBS deal to die after rate-lock: appraisal short and unable to right-size, environmental Phase II finding adverse to closing, MAC clause invoked on a market-condition shift, securitization-market shutdown that prevents the loan from being securitized.

Sponsor protection: do not rate-lock until diligence is substantially complete and credit committee has approved. The conservative path is to lock the rate within 14 to 21 days of expected closing; the aggressive path (locking earlier to hedge against rising rates) carries more break-fee exposure.

Hedge mechanics: CMBS originators hedge their pipeline using Treasury futures, interest-rate swaps, or TBAs. The break-fee calculation is the present value of the rate move multiplied by the duration of the hedged loan. Rising rates against the lender produce a positive break fee for the lender (cost to borrower); falling rates produce a benefit for the lender (no fee owed).

Refund at closing: at successful closing, the deposit is either refunded in full or credited toward closing costs. The deposit does not become an additional financing cost.