Strategies, Best Practices and Thought Leadership

Next Steps to Manage Your CRE Portfolio

My last blog covered five steps you should consider to promote diversification and/or alleviate a portion of the credit risk associated with real estate concentration.

Next Steps

Here are a few more as we look at managing a Commercial Real Estate (CRE) portfolio:

  1. Adopt or strengthen regular portfolio management practices (“early warning systems”) that can proactively identify a deterioration in operating performance or other various factors that can be indicative of added risk shifting to the lender. The use of internal “triggers” enables the Loan Officers to engage in meaningful conversations early as opposed to after the fact when, in many cases, it can be too late and conversations/negotiations can turn contentious. Covenants are binding between the bank and the client, but by the time they are violated there likely is already a problem. Internally tracking those same covenants (or others) at tighter levels simply to “trigger” the meeting and discussion with the client, can tend to lead toward more desirable results on both ends. Nobody likes surprises, especially banks. This practice is intended to work more proactively, and can help to reduce surprises.
  2. Adopt portfolio stress testing capabilities and procedures which can efficiently model interest rate spikes, declines in property values/changes in cap rates, occupancy deterioration, identify concentration(s) of certain national or regional tenants, and aggregate the type and location of collateral.
  3. Perform routine site visits, field audits, and internal policies defining criteria that would require an updated appraisal.

I hope these posts have helped start conversations about your CRE portfolio.  To learn more. check out Construction Lending 101: The Ultimate Guide to Modern Construction Loan Management.

Topics: Construction Lending

Josh Thompson

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As Business Process Architect for Baker Hill, Josh Thompson assists with product sales, implements software and provides industry guidance to new and existing Baker Hill clients.

Thompson is responsible for creating new client opportunities and furthering current clients’ success. He equips Baker Hill clients with both strategic and tactical industry recommendations, as well as supplies configuration assistance during software implementation.

Thompson received his bachelor’s degree in Finance and Real Estate from Indiana University, Bloomington and earned his master’s degree in Business Administration, Finance and Leadership from Butler University, Indianapolis.

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