As part of the 2016 annual reporting packages, lenders are requesting from borrowers financial statements, balance sheets, budgets, rent rolls and other documents. For many lenders, these requirements are similar to what has been seen in the past. However, in recent years some lenders have taken a more in-depth approach to analyzing financial statements and property performance due to more robust internal risk programs and the introduction of additional regulatory requirements.
Timing Is Everything
One change that can be found across the spectrum of capital sources (CMBS, Agency, and Life Insurance Companies) is heightened sensitivity to timely receipt of annual financial packages. Lenders want to ensure that statements are received by the deadlines found in the loan documents and are pressing servicers and, in turn, borrowers to make this happen. Lenders now expect 100% of statements to be received by the dates prescribed in the loan documents. (So don’t be surprised to receive some friendly reminders from NorthMarq as due dates approach.)
Rent Rolls Getting More Attention
Another area of increased focus is on property rent rolls and more specifically lease rollover and vacancies for commercial properties. In most cases, borrowers can expect to receive questions on month-to-month leases or leases expiring in the coming year. On such leases, NorthMarq has been asked to gather information about the status of the renewal and the proposed lease terms. NorthMarq may also be contacting you regarding prospective leasing activity for vacant space at the property and what rental rates are expected. Lenders use responses to these types of questions to forecast income at the property for the coming year and make risk determinations.
Fine-Tuning Operating Statements
Questions may also be forthcoming on property operating statements. All ownership groups present their numbers in slightly different formats, and lenders expect servicers like NorthMarq to ensure that line items are properly coded with one-time expenses and/or capital expenditures being appropriately excluded from NOI calculations. Lenders use operating statements and related information for valuation purposes and to calculate capital reserve requirements. As such, it is imperative that the calculations reflect the true performance of the property. Additionally, loans with lower debt-service ratios are subject to a higher level of monitoring, making it important that we communicate and collaborate with borrowers to ensure statements are analyzed accurately.
More Requests for Guarantor Financial Statements
The last item to watch for is the recent trend of requesting guarantor financial statements on an annual basis. This is not true of all lenders, but we are seeing an increase in inquiries being made from portfolio Lenders. The majority of loans that NorthMarq services are non-recourse with carve-out exceptions. However, regulators are pressing lenders to collect guarantor statements. Aware of the sensitivity of this information, lenders are offering different methods by which to ensure confidentiality. Please contact your NorthMarq representative if an issue of this kind arises.
We are aware that the requests for documents and the associated follow-up questions create some additional leg work for borrowers. However, the combination of the information the borrower provides and the analysis NorthMarq completes enables the Lender to assess the strength of the collateral and judge the level of attention the loan might need for the following year. If the Lender has a solid understanding of the property dynamics and events likely to occur throughout the year, the Borrower will likely spend less time on follow-ups or future Borrower requests.