10.28.16: Make Sure Your CMBS Term Sheet Is “Credit Approved” Before Signing

The credit box for CMBS conduit loans has gradually tightened during 2016, resulting in complaints from borrowers of last-minute reductions in loan proceeds before closing, mainly on cash-out refinances. Loan adjustments can often be traced to insufficient due diligence completed by the CMBS conduit lender at the beginning of the transaction, when the Term Sheet is executed. CMBS conduit loan brokers and borrowers help create a potential situation whereby loan proceeds are cut by demanding that Term Sheets be issued without providing sufficient due diligence information to the lender to allow an accurate assessment of the expected loan proceeds. As a result, lenders are issuing Term Sheets that may suggest unrealistic loan proceeds, creating a competitive disadvantage for lenders that are “honest” in projecting accurate loan proceeds or request additional information to make an accurate assessment of the expected loan amount.

A key determinant of whether the loan amount stated in a borrower’s CMBS conduit loan Term Sheet is accurate depends on whether the Term Sheet is “credit approved.” Best practices suggests that a Term Sheet should only be issued by the lender after the chief credit officer reviews the following and approves the deal:

  1. The CMBS conduit loan broker gathered all the diligence required for the loan to be fully cash flow underwritten for the past three to five years;
  2. market due diligence was completed;
  3. the appraisal review was completed with estimated value; and
  4. sponsor diligence was completed to affirm no sponsor credit issues.

“Borrowers and their loan brokers should recognize that this process is for their benefit. Yet they often resist completing the work,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We will not allow a Term Sheet to be issued that is not fully credit approved as it is very important to our reputation that we deliver the loan proceeds in our Term Sheets. With the CMBS credit box getting tighter, it’s even more imperative that borrowers follow the rules and allow complete due diligence prior to executing a CMBS conduit loan Term Sheet to avoid a nasty surprise at closing.”

This entry was posted in CMBS, CMBS Conduit Loans, Commercial Mortgage-Backed Securities, Commercial Real Estate Loans, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , . Bookmark the permalink.

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