I am about to suggest that borrowers need to cooperate with their lenders. I know that is might sound like a revolutionary thought, but go with me, at least for a while.
My understanding of the highest concern among regulators as it relates to commercial real estate is not necessarily that CRE fundamentals will deteriorate further, but rather that lenders have not acknowledged the deteriorations that have occurred to date and made the appropriate adjustments to loan provisions and reserve levels. The regulators want to know that the lenders are not overstating the value of current loan portfolios by failing to recognize potential losses that may already exist.
This is what regulators and bank examiners have always done. They have always wanted to ensure that lenders are appropriately identifying and classifying risk. The difference these days is that regulators have taken on a “guilty if not proven innocent” approach to commercial real estate. Given the turmoil across the sector, they will assume that there are potential problems unless they have evidence to the contrary.
But there is no reason to criticize good loans simply because there is no evidence of what might or might not be a problem.
And this is where cooperation comes in.
There are some fairly simple things that can be done, such as providing timely financial information. At a minimum, borrowers should provide the information required in the loan agreement on a timely basis. But take this further if you can. Submit quarterly information even if annual is required. Submit monthly if possible. Take budgets and pro formas seriously. And as we approach October 15, please remember to get tax returns in as quickly as possible.
The harder things include notifying lenders of problems as soon as they are recognized. The last thing a lender wants is to be surprised months after a negative has occurred.
Among the many lessons we should have learned over the past few years is that a strong financial system is crucial to a functioning commercial real estate market. Maybe we can work together to prevent further harm to the banks, which would cause further harm to the CRE market, by presenting good and timely information and by being open with real or potential problems.
(Brian Andrews is a certified mortgage banker specializing in the financing of commercial real estate. His business is Andrews Commercial Mortgage and he can be reached at brian.andrews@acmla.com.)
