{"id":5792,"date":"2023-08-08T14:21:24","date_gmt":"2023-08-08T14:21:24","guid":{"rendered":"https:\/\/www.yardiinvestmentsuite.com/en-gb\/?p=5792"},"modified":"2024-03-15T11:41:29","modified_gmt":"2024-03-15T11:41:29","slug":"art-of-the-covenant-best-practices-for-minimizing-cre-borrowing-risk","status":"publish","type":"post","link":"https:\/\/www.yardiinvestmentsuite.com/en-gb\/blog\/art-of-the-covenant-best-practices-for-minimizing-cre-borrowing-risk\/","title":{"rendered":"Art of the Covenant: Best Practices for Minimising CRE Borrowing Risk"},"content":{"rendered":"\n

Covenants \u2013 agreements between a debtor (borrower) and creditor, or lender, are a staple of commercial real estate loans. They’re designed to reduce risk for lenders. Furthermore, loan covenants commit the borrower to execute certain behaviours, such as making capital and interest payments when due. And avoid others, such as selling the assets that underpin the loan without first repaying it in full.\u00a0<\/p>\n\n\n

\n
\"Art<\/figure><\/div>\n\n\n

Certain economic conditions \u2013 falling portfolio values, high operational expenses, rising vacancy rates \u2013 increase the risk of violating, or breaching, a loan covenant, by being late on payments, reporting or by failing to meet financial benchmarks. <\/p>\n\n\n\n

One example of a covenant breach is a CFO missing a debt service ratio, which measures the cash flow available to pay current debt obligations. Furthermore, this could result in the lender “calling the loan”, forcing the company to obtain financing to repay the loan.\u00a0<\/p>\n\n\n\n

Avoiding such a scenario requires transparency in lender requirements and a deep understanding of the factors that influence debt, such as forecasts and rents. \u201cCovenant tracking is a big trend now. On the borrower side, the emphasis is on transparency and getting insight into debt portfolios,\u201d observes Chris Barbier, senior manager of investment management for Yardi. <\/p>\n\n\n\n

How can borrowers minimise risk and maximise efficiency in managing their loan covenants? One of the most reliable ways involves using one technology platform<\/a> rather than multiple systems for loan, asset management and investment activities. <\/p>\n\n\n\n

\n

\u201cIf you\u2019ve got an operating property \u2013 which is usually the collateral for the loan in a system \u2013 and then you\u2019ve got loans being tracked somewhere else, the two processes are not aligned. A tightly connected solution allows for better transparency and risk management.” <\/em><\/p>\nChris Barbier, Senior Manager of Investment Management, Yardi<\/strong><\/cite><\/blockquote>\n\n\n\n

Utilise a single real estate platform to minimise borrower risk<\/h2>\n\n\n\n

A single technology system that centralises all loan information and automates processes helps borrowers by: <\/p>\n\n\n\n