2. What has Happened to the Multifamily Industry Today? Vacancy has increased Concessions have increased Credit of our residents decreased Income has decreased Turnover has increased Expenses have increased NOI has decreased Capitalization rates have increased Property values have decreased Number of lenders decreased Loan to Value decreased
3. What has Happened to the Multifamily Industry Today? Example Prior YearsThis Year NOI 1,000,000 900,000 Cap Rate 6%7.5% Value 16,666,666 12,000,000 Loan to Value .80 .75 Maximum Loan 13,333,3329,000,000 Net after 10 yrs amort. .84 Loan balance today 11,200,000
7. Adopted by: Board of Governors of the Federal Reserve System (FRB) Federal Deposit Insurance Corporation (FDIC) National Credit Union Administration (NCUA) Office of the Comptroller of the Currency (OCC) Office of Thrift Supervision (OTS) Federal Financial Institutions Examination Council (FFIEC) State Liaison Committee
8. Purpose To replace the interoffice policy statements on the review and classification of commercial real estate loans issued November 1991 and June 1993 Intended to promote supervisory consistency Ensure that supervisory policies do not curtail the availability of credit to sound borrowers. To ensure that renewed or restructured loans to borrowers who have the ability to repay their debts according to reasonable modified terms will not be subject to adverse classification solely because the value of the underlying collateral has declined to an amount that is less than the loan balance.
9. II. Loan Workout Arrangements The institution will not be criticized for engaging in loan work out arrangements so long as it has A prudent workout policy that permits the institution to modify the workout plan if continued repayment performance is not met or if collateral values do not stabilize. B. A prudent workout plan for an individual credit that supports the ultimate collection of principal and interest.
10. The institution will not be criticized for engaging in loan work out arrangements so long as it has C. An analysis of the borrowers global debt service and a realistic projection of borrower’s and guarantor’s expenses D. The ability to monitor the ongoing performance of the borrower and guarantor Analyzing repayment capability of the borrower The character, overall financial condition, resources and payment record of the borrower
11. The ability to monitor the ongoing performance of the borrower and guarantor The degree of protection provided by the cash flow from the business operations or the collateral on a global basis considering the borrowers total debt obligations. Market conditions that may influence repayment prospects The prospects for repayment from any guarantors
12. The ability to monitor the ongoing performance of the borrower and guarantor Evaluating Guarantees Does Guarantor have financial capacity and willingness to pay Guarantee is adequate to provide support for repayment of the debt, in whole or in part Guarantee is written and legally enforceable
13. The ability to monitor the ongoing performance of the borrower and guarantor Assessing Collateral Values New or updated appraisal or evaluation as needed to support the plan New appraisal may not be necessary where an internal evaluation by the institution updates original appraisal assumptions to reflect current market conditions and provide an estimate of the collateral’s fair value
14. III. Classification of Loans Goals: Loans that are adequately protected by the current sound worth and debt service capacity of the borrower, guarantor, or the collateral generally are not adversely classified. Loans to sound borrowers that are renewed or restructured in accordance with prudent underwriting standards should not be adversely classified unless well defined weaknesses exist that jeopardize repayment.
15. III. Classification of Loans Nonmaturing Loan Performance Assessment For Classification Purposes Consider past record of performance Examiner should not adversely classify or require the recognition of a partial charge off on a performing loan solely because the value of the underlying collateral has declined to an amount that is less than the loan balance. However, it is appropriate to adversely classify a performing loan when well defined weaknesses exist that will jeopardize repayment
16. III. Classification of Loans B. Classification of Renewals or Restructurings of Maturing Loans Many borrowers whose loans mature in the midst of an economic crisis have difficulty obtaining credit due to deterioration in collateral values despite their current ability to service the debt In such cases the most appropriate and prudent course is to restructure or renew loans to borrowers who have demonstrated an ability to pay their debts but cannot currently obtain long term financing
17. III. Classification of Loans Prudent loan workouts or restructurings are generally in the best interests of both the institution and the borrower Renewals or restructuring of maturing loans to borrowers who have the ability to repay on reasonable terms will not be subject to adverse classification Adverse classification of a restructured loan is appropriate if well defined weaknesses exist that jeopardize repayment of the loan
18. III. Classification of Loans Restructuring may involve a multiple note structure where a troubled loan is restructured into two notes. Lenders may separate a portion of the current debt into a new legally enforceable note that is reasonably assured of repayment. This note may be placed back on accrual status in certain situations. The portion of the debt that is not reasonably assured of payment (the second note) should be adversely classified and charged off as appropriate. In contrast, the loan should remain or be placed on non-accrual status if the lender does not split the loan into separate notes, but internally recognizes a partial charge off.
19. Loan Categories Pass Special Mention (holding classification waiting on further information) Substandard Doubtful Loss
20. Example of a CRELoan Workout BASE CASE: Office Building $15,000,000 original loan 20 year amortization $13,600,000 Balloon at end of yr 3 75% LTV Stabilized appraisal of $20,000,000 D/S coverage of 1.35x Market interest rate Lender expected to renew loan at end of yr 3 Project cash flow has declined Rental concessions being given to compete and retain tenants
21. Scenario 1: Lender renewed $13,600,000 Loan Market rate of interest 17 year amortization Borrower not delinquent on any payments Borrower has cash flow 1.12x D/S coverage Review of leases – stable tenants, long term leases Recent appraisal @ $13,100,000 (104% LTV) Lender graded the loan as pass – borrower has capability to continue to make payments on reasonable terms. Kept loan on accrual status. Examiner agreed – full repayment of loan reasonably expected
22. Scenario 2: Lender renewed the $13,600,000 loan Market rate of interest 17 year amortization Borrower not delinquent on any payments NOI declined and D/S coverage ratio is 1.12x Leases coming up for renewal and additional concessions will be necessary D/S coverage not expected to drop below 1.05x Current appraisal not ordered Lender estimates current FMV is $14,500,000 (94% LTV) Lender did not ask for current borrower financials to assess the ability of the borrower to pay from other sources Lender graded loan as pass Examiner disagreed and listed the loans special mention – Although borrower has the ability to make payments now, there has been a declining trend in income stream, more potential concessions, and reduced collateral margin. Also lender’s failure to request current financial info and get updated collateral valuation represents administrative deficiencies. Lender maintained loan in accrual status. Examiner agreed because cash flow sufficient at this time and full repayment is expected.
23. Scenario 3: Lender restructured the $13,600,000 loan 12 month interest only at below market rate of interest Borrower been late on some payments D/S projected @1.12x based on new terms Short term leases at the property – some behind on rental payments Recent appraisal at $14,500,000 (94% LTV) Lender graded loan pass Examiner disagreed - borrower has limited capability to service the debt at a below market rate, interest only, has been sporadically delinquent, with reduced collateral position. Examiner classified loan as substandard Lender maintained loan on accrual status due to cash flow and collateral margin. Examiner disagreed – full payment of principal and interest not reasonably assured.
