A bank can efficiently enhance its CRE market knowledge bank-wide for a variety of purposes and with very little effort

Improving CRE risk management and productivity: a bank can efficiently enhance its CRE market knowledge bank-wide for a variety of purposes and with very little effort

Frank DiLorenzo

One of the keys to efficient risk management is having good information and having it quickly. Although large financial institutions normally maintain a separate department to conduct appraisal reviews, regional and community banks don’t often have that luxury. In some cases, these banks may hire a third-party appraisal firm to conduct the reviews; more frequently, however, a credit staff member who is independent of the transaction will be the one performing the appraisal review. If you are among the thousands of bank credit staffers who perform this function, you’ll probably agree that having a database of comparables would help make the review process easier and more thorough.

You can easily create a database of commercial real estate information for a given market. For each commercial appraisal you engage, provide the appraiser with a blank Microsoft Excel[TM] (or other suitable data management program used by both your bank and your appraisers) template that has headings for the information you would like in your GRE database. Several examples of typical headings are as follows:

* Property Type.

* Vacancy Rate.

* Cap Rate.

* Discount Rate.

* Map Grid Location (make sure all the appraisers are using the same map for this section or your data will not be of any use).

* Zoning.

* Square Footage.

* Rental Rates per Square Foot.

* CAM per Square Foot.

* Type of Construction.

* Sales Price per Square Foot.

* Appraisal Firm.

* Appraisal Date.

Ask the appraiser to complete these fields with both the subject property and comparable properties’ information (they will simply cut and paste data already contained in the appraisal report). When the diskette is returned with the appraisal, you can easily cut and paste the provided information into your CRE database. With just two minutes of effort for each new appraisal, you’ll be creating a CRE database that will enable you to search and compare similar properties in just a matter of seconds.

Consider the following scenario: You are performing an appraisal review on a proposed 12,000-square-foot office/warehouse, of steel frame construction, in map grid A-3. The rents the appraisal assumes for the new building are in line with the comparables also contained in the appraisal report. A search of your CRE database, however, shows similar properties that are actually closer in proximity to the subject property than are the comps contained in the appraisal. The similar properties in the CRE database reflect that the assumed rents in the appraisal for the subject property are 20% higher than office/warehouse rents in the subject’s immediately surrounding area. This will most likely lead you to delve more deeply into the appraisal to determine whether the higher rent assumption is justified or not. The same is true for cap rates, vacancy rates, and so forth. Checking whether the assumptions in the appraisal you are reviewing are within normal ranges will now be much easier. You won’t have to rely solely upon your memory.

Isn’t this information readily available on the Internet? Is it really necessary to create one’s own database? Yes, data similar to the information to be tracked in a CRE database can be found about some communities on realtors’ Web sites. And, if you have access to an online commercial Multi-Listing Service (MLS) directory, that information can be helpful as well. But normally, the information about commercial properties available on the Internet concerns a property that is listed for sale. The actual price paid for a property can differ significantly from its listing price, and that, of course, can result in significantly different conclusions if you were using “listing” data rather than “sales” data when performing your appraisal review. That’s why creating one’s own CRE database is a worthwhile undertaking.

To quickly expand your CRE property database, pull the appraisal reports for the CRE loans that the bank has made within the previous six months. If you have a staff member who demonstrates a high attention to detail and can enter the relevant information contained in those appraisals into your database, great! If not, it may be worthwhile to hire a sharp college student for a few hours a week to complete the assignment. The nominal cost is well worth it, given the time that can be saved when performing appraisal reviews later.

There are other time-saving benefits to maintaining this CRE database. As you know, each bank is responsible for conducting periodic reviews of the appraisers it engages to perform appraisals. A CRE database will make it much easier to document this appraiser review proces. With the push of a few buttons you will be able to see the list of every appraisal performed for your bank by a given firm. The reasonableness and thoroughness of each firm’s appraisals will be much easier for the bank to document. If there is a trend or a bias in a firm’s work, it will show up more easily in a review of the information contained in the database. This process has proven, over time, to help identify appraisal firms that were consistently aggressive in their assumptions, as well as firms that were consistently overly pessimistic in their assumptions. The results of the appraiser reviews can lead to discussions with the principals of these appraisal firms to address apparent biases. The process also can help determine which firms were going to be on the bank’s approved list of commercial appraisers, for what dollar thresholds, and for which property types.

Proactive Risk Management = Proactive Business Development (again!)

In the November 2002 issue of The RMA Journal, EQ discussed some efficiencies that a bank can experience by melding its risk management and business development efforts. Similarly, the CRE database is not solely a tool for expediting aspects of a bank’s risk management practices. It can also help a bank identify trends in such areas as development, vacancies, and property types. Paying attention to these trends can help a bank focus its business development efforts. A simple quarterly report summarizing CRE market trends can be prepared based on the trends evident in the CRE database. This report can be distributed to credit and production staff alike, enhancing everyone’s awareness of the current trends and creating a more knowledgeable and productive workforce.

Contact DiLorenzo by e-mail at DiLorenzoFrank@hotmail.com

After 17 years in banking and finance, DiLorenzo provides credit and sales consulting services to financial institutions. He previously provided the series “Getting Behind the Numbers” to The RMA Journal.

COPYRIGHT 2002 The Risk Management Association

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