Earlier this week, another member of ACMA called me to ask if I’d be on a panel (at the ACMA fall conference) that will cover "lessons learned for loan documents."

It was an easy "yes" for me – because I’ve covered parts of that list here (new non-recourse events); and as we work on distressed mortgage loans, we’ve been collecting and creating this list.

Here are a few more items from our list, with another comment by me on "how" they point to a very, very basic change looming for commercial real estate: transparency is arriving.

  1. New Financial Reporting Requirements:  commercial real estate finance is all about income and the ability to track and analyze – and to do it quickly and in a manner that allows for better decision making across the entire portfolio (since work loads increase – they do NOT decrease).  So, the loan documents need to support all of this.  Here are a few of the "new" provisions that we’ve seen implemented in workouts and now in new loan document forms:
    • the ability to dictate the format of reporting, such as the use of spreadsheets, XML formatting, and even the use of new data standards (such as those created by MISMO)
    • the ability to require new reporting requirements in the future, based on Lender’s regulatory or investor requirements
    • rent roll and operating statements on at least a quarterly basis
  2. Investors Need Transparency:  I firmly believe that a meaningful return of the CMBS market or product will require better loan level transparency.  It is a view that I now share with PWC, which leads off a recent report with this point:  "Rebuild investor confidence through transparency, expanded disclosures, and enhanced quality of information."  But loan level transparency is a very basic battle of perspectives:
    • commercial real estate professionals believe that the value of their project is closely tied to the "secret" recipe baked into the project by the developerowner (the recipe is the terms of the leases, the terms of the underlying debt, etc.) – and while the value of a project is grounded in the rental stream, the "details" can not be shared (such as the rent roll and lease summaries)
    • investors want to know "what" they are buying, and on the topic of CMBS bonds, a rating agency stamp of approval (i.e., a rating) is not nearly enough information; so this means they want (and I believe deserve) loan level information on lease terms – including the rent roll and the lease summaries

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