Commercial Real Estate Financial Markets. Yes, it matters.

[Jolene Desmond]

My background is in the commercial real estate financial markets. I have worked on behalf of groups of investors, bond holders to CMBS loans, overseeing over $6bb in outstanding loan balances on any given day.

What does that mean, and why does it matter?

It means that there is a trillion dollar market whereby a number of lenders take part in securitizing the loans that they close. They sell their loans. We have heard this term – selling loans. (Let me know if you want to know all the fancy, interesting details on the process.) When this happens than you end up tied to your loan documents as they are written – no leeway unless you want to pay for a modification, if they might even consider one. Lenders that sell their loans today are also taking part in what they call CMBS 2.0 (post 2007 underwriting criteria, where it is very common to see certain terms and conditions implemented for the additional security of the bondholders, and the increased risk of the Borrower (you)).

The one thing that I see over and over – even with some of the biggest players in the market, is this: Investors spend a lot of time and attention on the due diligence of the property, economics affecting property performance, property management, repositioning, and on closing the loan - - and NOT AS MUCH ATTENTION IS USED TO PREPARE FOR THIS ENTRY INTO THE FINANCIAL MARKETS, (WHERE THEY WILL BE RESIDING FOR UP TO TEN YEARS) AND HOW IT CAN ADVERSELY AFFECT THEIR RETURNS.

There are a few things you can do and know on the front end to help prepare.

• 1)Know how to read your loan documents.
• 2)Know the differences between Cash Trap, Cash Management, and Cash Sweep.
• 3)Know what a Trigger Event is, and if you have one written into your loan agreement.
• 4)Know how to efficiently request reserve disbursements.
• 5)Make sure your lender is never holding more than they need to in escrow.
• 6)Have a system set up to monitor your lender and their obligations, in addition to your own.
• 7)Know how to recognize and monitor risks based on how your loan agreement was written.
• 8)Know when you need to hire an attorney, and when you don’t.
• 9)Know the difference between Property Management and Asset Management.

Already experiencing some of these issues on a Loan? Let me know.