How many lenders on your team have worked a real CRE downturn?
For a lot of institutions, the honest answer is zero. A whole generation of lenders has structured commercial real estate deals in a market that mostly went one direction. They have never seen it go the other way.
Gina Marotta has. Her career runs from CMBS loan securitization in the mid-nineties through the FDIC closure era, where she sat on contract teams working the full CRE books of community banks being wound down. Today she runs CU CRE Advisors, providing participation underwriting, annual loan reviews, and third party credit officer services for institutions that want an experienced set of eyes on a file before they fund.
LOT Senior Credit Trainer Joe Davis sat down with Gina ahead of two live Q&A sessions this August. Here is what came out of that conversation, and why it should change what you look at on your next CRE file.
The LTV can look clean and the deal can still be in trouble
The good news: we are not seeing many 100 percent plus LTVs this cycle. The bad news: LTV was never the whole story.
Value is not just about the expense side of the operating statement. It is about the capital expense side of the balance sheet: the money needed to fund equipment replacements, property upgrades, and unit turns. Appraisers do not always include those costs in their valuation conclusion. That means a requirement of property ownership is getting missed, and it is getting missed in the concluded LTV.
You do not need a new roof or a new parking lot every year. But those things do not last forever, and the cash has to come from somewhere: ongoing operations, reserves, or borrower liquidity. If nobody planned for the capital needs that were always coming, the loan can look clean, the property can look fine, and the deal can still be in trouble.
The takeaway for appraisal review: do not flip to the value conclusion and call it good. Appraisals are part art, part science. Read for what they leave out, especially replacement reserves and deferred maintenance.
A $2,500 report that protects a seven figure loan
Gina is seeing balance sheet loans close without a property condition report or property needs assessment. For collateral that is thirty plus years old, that is a gap.
A thorough report runs $2,500 to $3,000. It is prudent due diligence, it is paid by the borrower, and it tells both the lender and the owner what is really going on behind the walls. Then the underwriting question becomes: does the borrower have the cash reserves to meet the replacement and renovation needs the report forecasts?
If they do not, that is not automatically a decline. It is a structuring opportunity. Capture those cash needs through property cash flow during the loan term.
This matters on both ends of the loan. Sufficient, sustainable cash flow is how you get paid during the term. Property condition is how you get paid at exit. Deferred maintenance impairs the borrower’s ability to refinance or sell when your loan matures.
Underwrite the operator, not just the asset
There is no such thing as passive income in real estate. A property is not set it and forget it, and lenders care because that property is the collateral and the source of repayment.
So the file needs to answer more than "does this operator own real estate?" Ask:
Do they have experience with this property type in this market? If not, have they engaged a third party management company?
Can they run capital projects, not just day to day operations? Running an asset and managing a boiler replacement are different skills.
What are their ownership routines? Do they have a process for bidding out an HVAC system? A facilities engineer or technical expert to oversee vendors?
A multifamily unit with extensive mold damage needs more than a property manager. It needs someone who can invest capital in the property in a prudent, sustainable way. If your operator cannot, your collateral degrades while your loan is outstanding.
Your real asset is not the building. It is the loan documents.
When lenders say collateral, most mean the real estate. Gina pushes further: the lender’s asset is the loan, and the loan lives in the documents.
If you ever have to exercise your rights as a secured creditor, you exercise them under the governance of those legal documents. Any gray area gets held against the lender in court, because the lender prepared the docs. In a judicial foreclosure state, inconsistencies between your note, deed of trust, and guarantee delay the process. Time is money, and a delayed foreclosure sits on your balance sheet as a nonaccrual asset that you report to your regulators.
The document review checklist runs deeper than most institutions go:
The promissory note: your primary asset and your right to repayment
Guarantees: your secondary source, and your ability to execute on it
Deed of trust or mortgage: your security interest, and whether you are in a judicial or non-judicial foreclosure state
Title policy and UCC filings: most UCCs expire after three or five years depending on the state. Are yours current?
Assignment of leases and rents: Gina has seen lenders close on income producing real estate with a deed of trust in hand and no assignment of leases and rents
One war story makes the point. Gina represented a credit union evaluating a participation in a single tenant deal. She asked the originator for the subordination of the lease. The answer: "We have a title policy." That does not help you. The credit union passed on the participation because the originator never put an SNDA in place for that single tenant lease.
Bring us your deal. The one that is nagging at you.
Joe and Gina could trade war stories for hours. Instead, they are taking your questions live in two sessions this August:
Monday, August 18
Monday, August 25
They will cover what a CRE downturn actually looks like on the ground, reading the capital side of a deal, sizing up the operator, and the credit and collateral review most institutions skip until it is too late.
The sessions are built around your questions, not a script. Bring a deal that does not quite feel right. A property where the numbers work but something is nagging at you. A document or title issue you are not sure about. Quantitative, qualitative, or just CRE vocabulary you want unpacked by people who have used it on real files. Attend either session, or both.
Register at lendersonlinetraining.com/cre-downturn-cycle/
