MBL 1600 Commercial Real Estate Loans

Transcription

1 MBL 1600 Commercial Real Estate Loans Effective: July 3, 2013 Departments Impacted Business Srvices Introduction These procedures supplement the MBL Policy with additional detail and guidance specific to loans secured by commercial real estate. Procedure GENERAL COMMERCIAL REAL ESTATE LENDING PROCEDURES North Island will entertain loans for Credit Union members for both owner user properties and for income generating properties. In all cases procedures and practices will follow the parameters as defined in NCUA Regulation 723. In the event that a subsequent update to Regulation 723 causes a conflict with these procedures, the regulation will prevail. All loans will be underwritten with attention first to the qualifications of the borrower and secondarily on the collateral securing the loan. The emphasis will be on the borrower s primary and secondary ability to meet the debt service. Given the One Form of Action rules in California, the tertiary repayment provided by the collateral will also be thoroughly analyzed DEFINITIONS--DEVELOPERS, INVESTORS, AND OWNER-OCCUPANTS Developer means a company, partnership or individual that meets the following criteria: Derives a significant amount of revenue and cash flow from the development and sale of real estate properties, either commercial or residential housing units, has a moderately leveraged balance sheet with adequate liquidity and ongoing cash flow from sale of properties, has extensive experience in the development, financing, sale and/or lease-up of commercial projects, and enjoys a strong reputation in the industry. Investor means a professional investor who, at a minimum, satisfies the following conditions: has substantial net worth and liquidity, and reflects cash flow capacity and stability (as established by a tax analysis) sufficient to withstand an economic downturn, has extensive experience in the management of the type of property that is the subject of the proposed loan, derives a significant amount of income from the ownership and management of income producing property, and may have some real estate development exposure but limited, if any, cash flow dependence on for-sale product to service overall debt. Page 1 of 13

2 Owner/User Properties means the property is at least 50% occupied by the borrower or a tenant legally controlled by the borrower ROLES - ORIGINATOR, RELATIONSHIP OFFICER, UNDERWRITER AND PROCESSOR The originator is generally the source of the new loan request. He or she can be a mortgage broker, a branch employee or for direct requests it could be a Business Services staff member. The Relationship Officer interacts and negotiates with the member, prospect and/or broker. He or she is most often a Business Services staff member or branch manager. The Relationship Officer manages the loan from initial inquiry through covenant tracking; throughout the process he or she will work closely with the Underwriter and later with the Processor with an eye towards member service, compliance and protecting the credit union. The Underwriter reviews and analyzes all of the financial data, property information and other supporting data and prepares a Loan Memorandum for submission to the appropriate authority for loan approval. Post funding, he or she also assists with covenant tracking, independent audits and annual reviews. The Processor takes over post loan approval, organizes the file, prepares loan documents, orders supporting reports and books the loan onto the Credit Union s host system. Post funding they also assist with covenant tracking, file maintenance and member inquires LOAN APPROVAL AUTHORITY Loan approval authorities for the Credit Union s loan officers and loan committees are detailed in Exhibit B of the Member Business Lending Policy. The Relationship Officer is typically responsible for gathering and submitting all appropriate information for analysis, with assistance from a Commercial Real Estate Underwriter as appropriate, so that an informed credit decision regarding the loan can be made. Loan applications may also be accepted from approved loan brokers that have gathered the member/applicant s financial and property information for the Credit Union s analysis. All commitment letters on Commercial Real Estate Loans should be signed by the Relationship Officer and should include a detail of all remaining subject to conditions as approved by the appropriate authority level. Exceptions to Credit Union Procedures and standard practices must be, highlighted in the Loan Memorandum, fully documented, justified and will require concurrence of the appropriate approval authority. Exceptions to policy may be considered, provided the proper authorities have approved the exception according to the provisions in MBL Policy Page 2 of 13

3 PROPERTY TYPES The acceptable types of owner/user or income-producing properties with satisfactory market appeal include multi-family buildings, office, retail and industrial buildings, faith based and other not for profit facilities. Loans on income producing land, leasehold estates and on leased land can also be considered. Land development projects generally pose considerably more risk and will only be considered for owner users and for members with exceptionally strong financial profiles. The Credit Union will not consider loans secured by land for future speculative development GEOGRAPHIC LENDING AREA & FIELD OF MEMBERSHIP Loans on properties within San Diego County will constitute the Credit Union s primary lending market. Loans are also permitted in Riverside and Orange Counties. Loans that are outside of the Credit Union's lending area, originated primarily through loan participations with other credit unions, must meet the Credit Union s standard underwriting criteria. Field of Membership is defined based on the sponsorship and not the location of the property securing the loan. Therefore, for existing qualified members, it would be within the Credit Union s policy to fund loans secured by properties located outside the Credit Union s defined market area. The procedure requires that loans outside the market area would be limited to well known members with proven track records with the Credit Union CONCENTRATIONS/DIVERSIFICATION To protect the assets of the Credit Union, it is North Island s policy to diversify lending risk and meet all regulatory guidelines and limitations by avoiding concentrations in any one portfolio. To effectively accomplish this goal, the Credit Union will further segment and monitor the various product categories by both loan sub-type and geography. ---Please refer to the information in Policy MBL Concentrations LOAN TERMS Loan terms will be negotiated with the prospective borrower, but not committed until such time as the proper loan approval is obtained. Anti-discrimination rules will be observed in all negotiations with potential clients and commitments to prospective borrowers, including but not limited to Fair Lending and Regulation B LOANS TO ONE BORROWER Page 3 of 13

4 Loan amounts that exceed the Credit Union s policy limits and Regulatory Limits for loans to one borrower may be considered when the amount that exceeds the limit is sold to a participant. North Island must receive a firm commitment from the participant before funding loans beyond the policy limit and must receive the funds concurrent with funding for loans that exceed the regulatory limit. The Credit Union will act at all times within the limitations on the extension of credit to a single borrower or borrowing entity imposed by applicable laws and regulations. Lesser limitations may be placed as is prudent and in the best interest of the Credit Union. Please refer to the MBL Policy for a discussion of this topic CREDIT STANDARDS Emphasis shall be placed on the integrity, capability and financial condition of the sponsorship and on the reliability and predictability of the net income generated by the security property. Loans are not to be extended to real estate developers or investors who have experienced a foreclosure, short sale or deed in lieu, unless there are compelling mitigating factors that are fully explained and documented Credit standards are more thoroughly discussed in the Credit Union s General MBL Procedure 0100, including excluding borrowers that fail to meet the requirements for Member in Good Standing PROCESS SUMMARY ORIGINATION Commercial real estate loan requests are accepted directly from new and existing business members, the branch system and approved loan brokers. The member, branch personnel or broker calls a Relationship Officer to discuss a prospective deal to see if it fits within the Credit Union s market area and commercial loan products. The Relationship Officer also discusses the underwriting parameters and preliminary pricing as it relates to the perceived strength of sponsorship. Direct requests and referrals from existing business members will be handled by a Business Services Relationship Officer that will follow up with discussing terms and gathering financial data. If the originator is a broker and he/she wishes to proceed, they will then the Relationship Officer sufficient financial information to demonstrate the property s NOI, including an Operating Statement and a current Rent Roll. Pictures of the property, when available, should be included in the . The earliest arriving will register both the borrower and the loan for the sending broker. The handling of requests that come from the branches can vary on a case by case basis, depending on the level of business lending experience of the branch contact. With referrals from less experienced employees, the member will be referred to a Relationship Manager that will continue to negotiate the terms with the prospect. More experienced Page 4 of 13

5 branch staff may work directly with the underwriter and continue to serve as the Relationship Manager. In rare circumstances the branch staff member could also participate in the underwriting and memo preparation. Pricing and products are further defined in Today s Commercial Real Estate Rates, updated on a regular basis to reflect the current market. For Commercial Real Estate loans the Credit Union must secure a first lien position. North Island also offers various other Business Loans that may be secured by a junior lien. Loans with negative amortization will not be considered under any circumstances. Upon receipt of the preliminary information and/or if the Relationship Officer determines that a complete application is forthcoming, the loan will be added to the Pipeline Report for tracking purposes. If the economics look good, a Relationship Officer will do a site inspection. The inspection report will include photos and ratings for Construction Quality, Property Condition, Marketability, Compatibility, Landscaping, Parking and general comments regarding the property and surrounding neighborhood. If the site inspection is satisfactory, the Relationship Manager will call the member or loan broker to request the full package and provide a soft quote of proposed rates and terms. This should assist the originator in quoting to the member/prospect. Term Letters are also available when required by the prospect and would typically require a cash deposit.. Required Information: o Financial Statements from the Borrower and all owners or guarantors, personal financial statements should also include a Schedule of Real Estate Owned. o Income Tax returns, with all supporting schedules (including K-1s), from the Borrower and all owners and/or guarantors. o Operating statements for subject property. o Rent rolls on subject property, if applicable. o Copy of existing or proposed leases, if applicable. o Pro-forma, if new or proposed property or if the borrowing business is under two years old. o Copy of any ground leases that may affect the property. o Operating statements for borrower s existing rental or leased property. o Environmental Questionnaire & Disclosure Statement PROCESS SUMMARY - UNDERWRITING The procedure matrix for LTV and DCR is located below. The MBL Policy as Exhibit A details more restrictive Policy Limits Loans that do not meet the procedural limits, but are Page 5 of 13

6 still within policy limits may be approved within existing loan approval authorities, provided the exception is identified and fully supported. Property Type LTV Limits DCR Limits Commercial/ Industrial 75% 1.30x Faith Based 70% 1.50x Unimproved Land 50% N/A Entitled Land 65% N/A Leased Land 75% 1.30x Leasehold Estate 70% 1.35x Hospitality 70% 1.40x Mixed Use 75% 1.25x Multi-Family 75% 1.20x Office 75% 1.30x Other Non Profit 75% 1.30x Other Underserved 75% 1.30x Residential Underserved 75% 1.20x Retail 75% 1.30x SBA % 1.10x Residence % 1.20x Single Purpose 65% 1.40x The Loan to Value limits listed above are for purchase transactions and or rate and term refinances. For purchase transactions the LTV would be the lessor of purchase price and appraised value. After one year from the purchase date the LTV would be based solely on the appraisal. Loans with cash out, other than costs to refinances, would typically require LTVs 5% lower than indicated above. In general, loans or guarantees secured by real estate should be underwritten in such a way so as to ensure soundness and should never be made if primary reliance is totally on the collateral. Underwriting steps for commercial real estate loans should include the following considerations Page 6 of 13

7 1. Upon receipt of the package from the originator, the underwriter will begin the analysis and any questions back to the member/prospect, either directly or through the originator. If the questions are complex and require the originator to provide information not readily available, the deal may be suspended until the answers are received. 2. Loan Memorandum The Underwriter will prepare a memo that describes: Sufficient detail to allow the appropriate approval authority to have a clear understanding of the facts, conditions and circumstances involved in the transaction. The loan purpose should be identified, understood and be of a nature generally extended by the Credit Union. If the commercial real estate being taken as collateral is occupied by the borrower s business, then an analysis should be done of the credit worthiness and financial capacity of that business and any guarantors/owners of the business. In this owner/user situation, covenants should be included that requires both financial performance and reporting from the business occupying the property. The performance covenants should be tied to industry norms as presented in studies done by RMA or similar publications. 3. Property Income The rents should be adequate to cover an allocation for realistic vacancy, operating expenses of the property, and all the real estate loan payments. The Debt Coverage limits above are generally based on the historic NOI; however, the projected NOI may be used, provided the appraiser s market rents support the higher figure. If the current rent roll does not support the projection and there is anticipated time delay to reach the stabilized projection a customized structure is indicated usually with a holdback to assure that the long term DCR will be within guidelines. For owner user properties the loan will be underwritten to meet Global Cash Flow and the appraisal must also indicate a Market NOI that supports the DCR guidelines. 4. Global Cash Flow The North Island s underwriting is relationship based and not collateral dependent; therefore, Global Cash Flow will be the determining factor for meeting the income requirement for loan approval. For owner-user properties greater reliance must be placed on the borrower s global cash flow. 5. Guarantors The underwriting of all commercial real estate loans will follow the Credit Unions procedure for Personal Guarantees, as further described in Procedure MBL Credit investigation - A credit inquiry through a credit reporting agency should be made on the borrowers and others (i.e., guarantors, owners, or partners) that will be obligated for repayment of the loan. Negative credit history needs to be seriously evaluated, and if it cannot be satisfactorily explained, it is often sufficient reason for the declination of a loan. Page 7 of 13

8 7. Rates and terms - The term of the loan should be reflective of its purpose, the borrower's repayment source and in accordance with state and federal laws, if applicable, and the Credit Union's desire to have the loan repaid in a timely manner. The amortization period may not exceed the remaining economic life of the improvements as determined by the appraiser. The maturity of the loan should be at least 10 years less than the remaining economic life of the improvement. 8. Lease priority - The priority of any existing tenant lease over the Credit Union's lien instrument is to be carefully analyzed. Other than residential, cell towers, maturities of less than 12 months and month to month leases, Subordination Agreements are to be executed for the following: Leases on owner-occupied properties Leases for tenants owned or controlled by the borrower or guarantor(s) Leases which grant the lessee an option to purchase the property or a right of first refusal on a future sale of the property. All other tenants who do not meet the above-listed criteria are to execute a Subordination Non-Disturbance and Attornment Agreement (SNDA). Occasionally tenants do not have any incentive to cooperate and obtaining their signatures may become problematic. The Relationship Officer may waive select SNDAs on a case by case basis, provided the title company issuing the policy has agreed to not show the leases as exceptions in the final policy. Often Commercial Leases include the required Subordination and Attornment language, which will enable the title company to eliminate the exception If the policy is to show the exceptions then the waiving of the SNDA requirement must be approved by the appropriate approval authority based on the size of the loan commitment. 9. Ground lease: North Island will consider loans secured by a Leasehold Estate under the same general rates, terms and underwriting standards as Fee Simple and Leased Fee, provided it can effectively secure its lien. If the Lessor is unwilling to subordinate to North Island s deed of trust, the underlying Lease must include several characteristics in order to be considered financeable by Credit Union. A well-drafted lease will have these mortgagee protection provisions grouped for convenient reference. These characteristics include the following: The lease term must exceed the loan term (or the amortization period for a loan with a balloon payment) by at least ten years. The term should be much longer if North Island expects to be repaid through refinancing in several years. The lease may not be terminable by agreement or upon damage to or destruction of the premises without the consent of North Island. A lender must be entitled to notice and an opportunity to cure any default before the lessor may terminate the lease on account of the default. If the default under the lease is of a nature that it cannot be cured by the mortgagee, North Island must have an opportunity to complete foreclosure against the lessee so as to put itself or the purchaser at foreclosure into the leasehold interest and into a position to effect a cure of the default. Page 8 of 13

9 If the lease should terminate, North Island or its successor should be entitled to complete foreclosure and then to enter into a new lease with the lessor on the same terms and with the same remaining term as the terminated lease and to assign the new lease without undue restrictions and without further liability. The permitted use clause should be broad enough to accommodate all reasonable uses by assignees. The lease should expressly permit encumbrance of the leasehold interest. The lease, or North Island s arrangement with the owner, must give North Island adequate rights to proceeds of condemnation and insurance. North Island should have the right to exercise or require the exercise of extension or renewal options if failure to exercise would impair the value of the lease as security. The obvious purpose of these protective provisions is to prevent the lease from being terminated or amended to the prejudice of the Credit Union before or after foreclosure. They should be drafted not merely to prohibit such changes but to make them ineffective against North Island; a claim for breach of contract will do North Island little good. 10. Appraisal Every real estate secured extension of credit should meet Credit Union appraisal requirements outlined in the Valuation for Commercial Section (See MBL-1700) of the MBL Procedural Manual. While the loan is under consideration by the approval authority, the Underwriter will submit a request for an appraisal bid to an independent vendor contracted with the task of selecting the appraiser. After the member has agreed to the terms in the commitment letter and submitted a check to cover the expense, the appraiser will be formally engaged by the Underwriter or Loan Officer. Upon receipt of the completed report the Commercial Real Estate Underwriter will complete a comprehensive review with any discrepancies and errors reported to the appraiser for corrections. A new appraisal is not always required. Please refer to manual section MLB-1700 for details. 11. Commercial Real Estate Loan Risk Rating Model The Excel formatted model should be completed for all new, renewed and modified loans. The model includes metrics for both the borrower and subject collateral. For new loans the calculated result can be used for pricing. Although the scales are not exactly aligned, the results are similar to Loan Grades and the model serves as a more objective tool for risk monitoring. 12. Environmental Risk Analysis Credit Union management believes strongly that potential risks and liabilities associated with loans secured by real estate on which a hazardous waste problem could exist; must be subject to evaluation for this risk. The topic is addressed further in, in more detail in our Environmental Procedures - MBL 1800,. Page 9 of 13

10 13. Commitment Letter -Following approval, a commitment letter will be issued to the borrower, for broker originated requests the letter will be delivered through the broker. The letter will lock in the interest rate in effect at that time, detail any subject to conditions, and quote the cost of the appraisal and any anticipated environmental reports PROCESS SUMMARY - DOCUMENTATION AND FUNDING Loans secured by trust deeds require careful adherence to detail to protect the Credit Union s lien rights: 1. The processor s first step will be to order a Preliminary Title Report. 2. Upon approval the loan memorandum and all the supporting materials are passed from the Underwriter to the Processor. The Processor creates a loan file with all the financial, property and supporting information organized under separate tabs. Depending on the complexity of relationship there can be several files with General, Property and Financial data split into separate folders so that files do not become voluminous. The loan memo, as supported by the commitment letter, serves as the template for the processor to follow for rate, terms and subject to conditions and covenants. 3. In order to assure compliance with all applicable laws and regulations, the Credit Union utilizes third party vendors to assist with the preparation of all loan documents. The primary provider, Laser Pro, provides a compliance guarantee and is considered an industry standard. On a case by case basis, such as for properties out of state or complex credits, the Credit Union may contract with a specialized provided and/or an attorney. 4. The original Promissory Note and any subsequent renewal must recite that the obligation is secured by a deed of trust. 5. The original Promissory Note, Commercial Guaranty (s) and all the documents that are recorded with the county are retained in a fireproof cabinet. 6. The borrower is required to provide flood insurance unless the improved property is located in Flood Zones B, C, D or X as indicated in the Flood Certification Report. The Credit Union's procedures concerning flood insurance are to be consistent with regulatory requirements 7. An ALTA title policy should be obtained to substantiate that the lien is in first position. 8. The Deed of Trust, the Assignment of Rents (separate document), Lease Subordinations and/or SNDAs are all sent through escrow for recording with the county recorder. For select loans, those in which the credit union is not paying off an existing loan with another lender, the documents can be sent directly through to the title company. Page 10 of 13

11 9. Documentation typically includes a Commercial Security Agreement and the Credit Union records this lien with a UCC-1 filing with the California Secretary of State. The Trust Deed, which is filed with county, already includes a lien on Furniture and Fixtures. The filing of the UCC with the state does very little to improve the Credit Union s lien, unless the collateral is moved. If the fixtures are stripped from the building and moved to another location, the county filing does not help the Credit Union; however the state filing does. 10. The Credit Union requires fire insurance coverage that provides for full replacement of damaged or destroyed property and names the Credit Union as loss payee. Laser Pro reinforces this requirement with three documents (may vary with customized documents as mentioned earlier); Agreement to Provide Insurance, Notice of Insurance Requirements and Hazard Insurance Disclosure. 11. The loan processor will board the loan onto the credit union s host system and fund the loan according to the terms of the loan memo, commitment letter and Disbursement Request and Authorization. The processor will also move the loan on the pipeline report from pending to funded. On the following day a different individual will review and initial the file maintenance activity report, according to the credit unions policy on dual control for loan fundings. 12. The law requires that the member has the right to receive a copy of the appraisal, which is further reinforced with the loan document Disclosure of Right to Receive a Copy of an Appraisal. The form indicates that the Credit Union will cooperate with a member request; however, as a matter of procedure the Credit Union will make it a routine practice to deliver a copy of the appraisal to the member with or without a request, as part of the funding process. 13. Modifications and extensions, if properly drawn, are generally valid between the Credit Union and the member, but the lien position could be compromised if it is held to be prejudicial to the claims of intervening encumbrances (trust deed liens junior to the Credit Union s) and other claimants. Some of the actions, which could be held to be prejudicial, are as follows: a. An increase in interest rate beyond the defined terms in the original note. b. A renewal beyond the maturity date defined in the Deed of Trust. (Most of the Deeds of Trust prepared by the Credit Union do not include a final maturity date.) c. Any renewal, modification or extension made in the face of an intervening action filed by a third party claimant to the real property (a notice of lis pendens) could totally extinguish the security interest. d. The above problems could possibly be overcome by obtaining subordinations from all parties claiming an interest in the property, but this would generally be impractical. In most instances, it would be difficult to even ascertain who all of the claimants are. Any such subordinations should be recorded and recognized by an endorsement to the existing title policy. Page 11 of 13

12 PROCESS SUMMARY - SERVICING The servicing of commercial real estate loans is predominately handled by the loan processors in the Business Services Department, with some support from the Credit Union s Real Estate Loan Servicing Area and the Asset Management Department, all of which follow their normal guidelines for loan boarding, payment processing, escrow administration, modifications and extensions processing, loan payoffs, delinquency and foreclosure processing, and claims processing. Annual Financial Updates - Similar to Term Loans that are placed on the Credit Union's Commercial Loan books, there is a requirement for annual updates of the borrower's financial statements on all Commercial Real Estate Loans. This update should include information on the borrower, guarantor, his/her business, and a P&L Statement on the property itself. This requirement will be communicated to the borrower in the Commitment Letter and the loan documents and will be monitored by the Relationship Officer and Underwriter assisted by the loan processors who will maintain a database for covenant tracking with the Credit Union s host system. Continued monitoring of LTV and DCR metrics is discussed in the procedural manual section CRE Loan Reviews and Portfolio Monitoring MBL PARTICIPATIONS The Credit Union will evaluate and analyze any participation request as if the Credit Union was the originating lender. Copies of underlying loan documents and information on the borrower will be maintained in the Credit Union's records. See Section MBL-1400 of this manual for required documentation and procedures relating to administering the Participation Agreements. Controls Include any control steps needed for the procedure. Reference Documents Include the names and/or links to all documents that are related to the procedure. Page 12 of 13

13 Revision History REVISION DATE DESCRIPTION AUTHOR Added LTV & DCR limits R. Reck Approvals NAME TITLE DATE Hudson Lee Sr. Vice President Page 13 of 13