COVID-19 has made insight into a property’s individual tenants more valuable than ever
Prior to COVID-19, America’s commercial lenders had little to agonize over. Retail’s gradual erosion meant many were keeping an eye on certain borrowers, but few had reason to think their risk mitigation strategies were in need of an upgrade.
Fast forward to late 2020: Restaurants are closing left and right. Small shopping centers are struggling. Hotels are quiet as mausoleums. And the owners of these properties are now at risk of falling behind on their mortgages, creating unheard-of servicing burdens for the providers of their loans.
According to Rich West, general manager at commercial real estate data and solutions provider LightBox, many lenders were caught off guard by their borrowers’ coronavirus nightmares because they were lacking the requisite insight into the health of their properties.
“As a lender, a lot of them don’t have the infrastructure to monitor the real estate that closely,” West says. “That’s one of the gaps that we’ve seen. The lenders that are able to really understand, month-by-month, what the cash flows at their properties are and how that impacts them, those are the lenders that are going to be more successful.”
West says lenders need a “very clean and frequent data feed” from the properties they have loans on. He says accessing three key pieces of information can help them detect issues at the tenant level before they get out of hand and threaten a property’s profitability and the viability of the associated mortgage.
“If you don’t understand what’s going on at the properties that you’ve made loans on, the problem just gets worse,” West says. “It’s much better to get in there and figure out what’s going on.”
The first, and in West’s eyes most important, piece of data lenders should be examining is tenant rent performance: Who’s paying and who isn’t. He says it isn’t enough for lenders to make sure they received this month’s mortgage payment. They need to be combing through the data to see if next month’s payment is in trouble.
“You really need to dig in and understand what’s going on with the real estate itself,” he says.
Second, lenders should formulate their loan agreements in a way that grants them insight into the financial health of a borrower’s tenants. Landlords often have the right to access tenant sales levels. Lenders, West says, should make use of that data themselves.
“It’s actually fairly common that there’s some transparency into the tenant’s business,” he says. “That’s in the lease agreement between the landlord and the tenant. A smart lender will make sure, in their loan documents, that they have the right to see that data.”
Finally, a system must be put in place to determine whether tenants are still occupying the spaces they are renting. West says that during the Great Recession it was common to see businesses that closed up shop in the midst of the turmoil listed as active tenants on a property’s rent roll for months after they vacated their spaces.
“I don’t have any data on this time around, but I guarantee you it’s happening again,” he says.
Having these data sources in place allows lenders to be proactive. Rather than waiting for the mortgage payments to dry up and then using valuable resources to determine the cause of, and remedy for, the delinquency, lenders can approach their borrowers ahead of time and suggest pre-emptive solutions that can benefit both parties.
While tech plays a role in the data gathering strategies suggested by West, he says lenders still need flesh-and-bone associates in the field to ensure they are receiving a full, accurate view of what’s happening in their borrowers’ properties.
“Technology helps to look at things from a portfolio level,” he says, “but it’s no substitute for talking to your tenants if you’re a landlord and, if you’re a lender, talking to your borrowers and understanding what’s going on on the ground.”