OVERVIEW
As analysts closely monitor global events and their impact on financial markets, the financial state of commercial real estate continues to be a primary focus for many. Businesses and financial institutions with significant commercial real estate investments should be proactive in identifying at-risk properties in their portfolios, and what steps can be taken to avoid financial loss for shareholders and pressure from regulatory agencies.
CLIENT SCENARIO
A Texas-based national bank recently came to DEODATE in need of identifying measures they could take around a client with increased financial risk. The borrower had taken multi-million dollar commercial loans for properties in Southern California. Those loans were provided under an agreement that the borrower would perform a number of improvements to those properties designed to maintain or increase their value. When the client failed to complete those improvements, the bank faced an increased risk that the client could soon default on their loans, leaving the bank with unoccupied properties in a challenging market.
If the bank were to be left with the properties, they would not only lose the value of the loan, they could also potentially be forced to sell them for below their potential value due to the current downturn in the economy. The bank knew they could also face increased scrutiny from regulators by failing to have a reputable lending history and comprehensive downside protection strategies.
CHALLENGES
Lack of expertise in the current commercial real estate market | Time required to digest and analyze a complex property portfolio |
Unclear understanding of specific issues related to the property | Lack of bandwidth from the bank’s internal credit and real estate teams |
Need for proactive worst-case scenario planning | |
SOLUTION
The leadership team at DEODATE used a powerful, data-driven analysis of these particular properties, as well as the real estate market as a whole, to provide the bank with peace of mind across a number of fronts. We were able to closely analyze the borrower’s property portfolio to determine whether they were up to date across all payments, including their property taxes, to help our client determine the likelihood of default. In light of DEODATE's extensive experience in representing public agencies, it was also able to vet and qualify statements made by the borrower regarding civic delays of submitted plans and building improvement initiatives.
Our client was also willing to introduce the DEODATE team directly to their borrower. This gave the borrower a neutral third party who understands today’s commercial real estate owners’ needs and challenges, and an ability to encourage them to maintain payment on their loans and to complete the agreed-upon actions to their properties.
While a bank’s ideal scenario is a borrower maintaining their principal and interest payments, this, of course, doesn’t always happen. Banks, therefore, need robust downside protection and exit strategies, to avoid preventable financial losses and a loss of trust amongst shareholders and regulators.
By closely analyzing our client’s at-risk properties in question, DEODATE was able to identify significant increases in the properties’ potential value, should they be converted to more in-demand intended uses. This gave our client increased peace of mind by understanding the higher potential value of their properties, and a profitable repurposing strategy should their borrower default on their loans.
RECOMMENDATION
Any bank with a sizable portion of their business being dependent on financial returns from commercial real estate should be prepared for the potential of increased disruption to this industry. Many analysts, including our own, predict that we’ll see continued uncertainty, so it’s important for banks to be able to forecast the future standing of their loans as accurately as possible and to have sound downside protection strategies in place to mitigate risk and financial loss.
Contact us today to inquire as to how these results were achieved, and how similar, tailored strategies may assist your organization's initiatives.