What to Do With Your CRE Portfolio

In follow-up to the earlier Commercial Real Estate (CRE) blogs, the following are action items that banks of all sizes should consider in promoting diversification and/or alleviating a portion of credit risk associated with real estate concentration:

1. Business processes should promote prudence in the underwriting and approval processes. Large, complex, or unfamiliar real estate lending should be underwritten by specialty groups or by bankers who are well-versed in CRE credit and knowledgeable about local, regional, and national real estate markets.
2. Heavier emphasis should be placed on analyzing and/or sensitizing financial projections. Multiple scenario analysis (i.e., base, best, and stress cases) can reveal potential cash flow or working capital issues, etc.
3. Deal structure, including the requirement to maintain certain financial covenants, should be commensurate with the perceived level of risk. Annual covenants are often insufficient given the cyclical nature of real estate. The sophistication level of legal documents, including credit and security agreements, should also reflect the risk level of the deal.
4. Supervisory and internal credit policies, which define structural limits on loan amortization, loan-to-values, etc., should be adhered to.
5. Reporting capabilities and accompanying business processes that track CRE portfolio composition should be broken out by real estate type.

Note: This post is part of Construction Lending 101: The Ultimate Guide to Modern Construction Loan Management.

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