Roadmap Created to Handle Commercial REO

New York-KPMG Corporate Finance's real estate services division has created a roadmap, backed up by a set of detailed best-practice policies and procedures, to help a large financial institution take commercial property into REO.

The financial institution has not handled REO for about 10 years, according to Harold Bordwin, managing director and co-group head of the real estate services team.

"This institution is going from no REO in the past 10 years to one large commercial property now. It anticipates a substantial increase in REO coming in the next 12 to 24 months," said Mr. Bordwin.

"There was nobody left in the institution who had ever worked on REO. With this fresh property, they were concerned they didn't want to be learning on the job. Given it is not just a 'onesie' but a flood coming, they wanted to set up best practices for what to do so they wouldn't make mistakes. While learning on the job might be good in a startup company, it's probably not good in a large financial institution."

The roadmap identifies what issues have to be addressed and how to go about handling the process throughout the lifecycle until the property is sold. "It details how you do that while integrating and coordinating with finance, accounting, legal departments, insurance, risk and tax," he said.

"Think of it like a flow chart, detailing each step of the process with what decisions need to be made along the flow chart and then developing what are the right protocols for making those decisions."

The roadmap describes who should participate in the process, what information should be at the table for the decision makers, and at the end of the day it says who has the approval authority. "If this is a big piece of your businesses and represents a substantial number of assets as well as amount of capital, you can't do it ad hoc. You really need to institutionalize what are the best practices at each decision point, and there are a lot of decision points," said Mr. Bordwin.

The roadmap recommends that banks establish an REO management committee to meet quarterly. It sets guidelines to monitor and approve property and portfolio performance against established property-level business plans and capital plans. Study property performance and vendor reports.

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