What will be happening to the market for commercial real estate-owned properties over the next few months?
REED: It's going to be more difficult, particularly for the larger valued properties. The smaller commercial properties, with values less than
Unfortunately, underwriters are less willing to provide reporting form coverage on larger valued commercial properties without more extensive underwriting information that is often not readily available to our lenders. There's carriers that are offering reporting form policies for commercial properties, but doing so with rates that are so high that the premiums are more than what our clients are willing to pay.
What are the liabilities and what risk management strategies can financial institutions use to mitigate them?
TAYLOR: The liabilities come in two basic categories. One is the loss or diminution of value of the actual collateral that you've repossessed, which now suddenly is on your balance sheet as a real item. And the other piece is the liabilities that you may assume, or do assume, once that property is transferred to the institution.
The causes of loss are pretty obvious: fire, theft of items. You continually see commercial buildings that have the copper wiring and plumbing stripped out for the metal value. You see appliances and commercial tanks taken away, anything that's not bolted down, and sometimes is, taken away. There's general vandalism, water damage, mold, poor maintenance, whatever.
So the very first thing that we recommend is basically what insurance is all about, and it starts with the concept of care, custody and control. When an institution takes possession, you have total responsibility for everything involving ownership. Develop a really clear and consistent strategy as to all the steps (not just one person follows) but the institution follows, upon that repossession. When you own it, you're responsible for everything. Assume that.
What are the factors that figure into whether to actually take control of a distressed property?
DENNIS: The most important thing is to take time before foreclosure, which includes understanding what the asset is before we ever take control of that property. Most of the time you visit a site, see if there is prior fire damage that could create mold exposures, or inferior site preparation causing construction defects including review contracts that a bank may be forced to honor if the process isn't completed correctly.
Even with a thorough review, sometimes a bank may take back a property that has unforeseen risks come to light after the fact. When that happens some of the ways a bank can mitigate its liability is to try to sell the property as quickly as possible to get off of the chain of ownership, and to also seek buyers that are savvy in either construction or the type of asset that is causing concern.
In the event that there is an allegation or claim down the road, the bank has potential defenses that they didn't dispose of the property to some unsuspecting buyer. The bank can also, case by case, decide whether to purchase additional insurance that would protect them against the defects or liabilities involved.
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