REO Roadmap Created to Handle Commercial Assets

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

This particular 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, which is based in New York.“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,” Mr. Bordwin told Managing REO.

“There was nobody left in the institution who had ever worked on REO. With this fresh property, they were concerned that 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 REO 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.

At each of the decision points KPMG is helping its clients to understand the relevant key performance indicators and key risk indicators.

Among other things on the roadmap, the division is recommending that banks establish an REO management committee to meet quarterly. The purpose of the quarterly committee meetings will be to provide for periodic management review of asset management operations, and to oversee adherence to operational procedures. It sets guidelines to monitor and approve property and portfolio performance against established property-level business plans and capital plans.

“If it’s a hospitality property, if you are going to hire a property manager, what are the questions you need to have answered to make that decision? At the end of the day, what a lot of our flow chart revolves around is each property needs to have it’s own business plan. This would deal with all of the operational, financial issues surrounding that property.”

Through the roadmap, the company further recommends key steps to making these quarterly meetings productive. Based on the guidelines, clients are encouraged to obtain and review reports from asset managers and to re-evaluate the property business plan including any amendments recommended by the asset manager.

Study property performance reports, vendor performance reports and valuation results. Re-evaluate existing and emerging risks, he recommends.

“In an ad-hoc situation, people are making decisions on the fly and having discussions in the hallway. Whereas, once you institutionalize it, people know who is responsible for what and when they have to deliver it — how it gets documented and how it ends up in the file.”

As commercial REO grows, Mr. Bordwin says it’s important not to be caught unprepared. “People should understand what their roles and responsibilities are. It’s all about preserving value. Financial institutions with commercial property have the ability to get significant returns if commercial property is handled properly.”