3 steps toward better debt management for commercial real estate investors
SummaryToday’s leading commercial real estate (CRE) investors have followed a three-step process to optimize the management of their debt by minimizing operational and data integrity risks, portfolio blind spots, and time-intensive processes.
Step 1: Centralize loan data to minimize risk
The first step is mitigating data and operational risks with centralized, high quality data. This cannot be effectively achieved in Excel, particularly as portfolios grow. Most investment managers do not have dedicated in-house debt management experts and few firms maintain a comprehensive internal system to accommodate the nuances of their various types of real estate debt and associated derivatives. Both are cost prohibitive and neither leverage industry best practice. The top CRE firms adopt a solution that:
- Provides administrative and operational support through real estate debt specialists who extract, populate, maintain, and quality control data in a purpose-built system
- Proactively guides them to the best practices and most efficient workflows in the industry
- Provides ease of access to various team members through permission-driven interfaces tailored for each individual user
Step 2: Integrate debt management with property, asset, and portfolio management for enhanced reporting
Managers need to weave debt data into their enterprise ecosystem of workflows, processes, and systems. Such data and workflows include debt valuation, open prepayment windows, prepayment (refinance/sale) analysis, hedge breakage gain or loss, extension options, budgeting and forecasting, scenario analysis, and a wide variety of flexible reporting tools for internal and external purposes. APIs and tailored processes eliminate double entry and provide accurate outputs from property managers to the C-suite.
Step 3: Add comprehensive lender relationship management and proactive covenant control
Managing and recording debt placement processes, win/loss recording of bids or indications, matured or prepaid loans, and tracking total commitment as well as current unpaid principal balance enables investors to grasp a complete picture in lender (or borrower) relationship management. Further, mastery of debt requires awareness, workflows, and monitoring of covenants, resulting in proactive communication, compliance, and reporting. Investors in debt (lenders or noteholders) may also leverage a collateral valuation assurance service to aid in monitoring the debt’s underlying collateral value and thus the quality of their asset (loan).
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Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.20-0320
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