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Comprehensive due diligence up front ensures predictable success. We know that the best way to make a great investment is to evaluate it properly in the first place. Before making any investment, we perform extensive, hands-on, property level due diligence. LNR is famous within the CMBS industry for the thoroughness and intensity of its due diligence process. LNR's due diligence process is divided into three major stages: To provide preliminary pricing for a CMBS purchase, LNR uses our own proprietary financial models to analyze data on the collateral provided by the investment bank underwriting the CMBS issue. That information, together with the executive summaries prepared by the issuer are used to form a preliminary opinion on the transaction, including an estimate of loan loss risk, identification of potential problem loans or problem borrowers, and the effect of proposed bond subordination stipulations. Using this information, LNR negotiates a purchase price for the bonds, subject to full scale due diligence to confirm our initial opinion. LNR's due diligence has three components: Asset Underwriting, Site Inspection and Legal Review of Trust Documentation. Rather than maintaining a separate underwriting team, LNR uses its loan and real estate asset managers, those individuals who deal with problem loan situations on a daily basis, to underwrite the loans. We believe that this provides the full benefit of our special servicing experience for our acquisition and underwriting activities. Our asset managers also know that they will have to deal with any problem loans included in portfolios that they recommend we invest in. Asset Underwriting Asset underwriting culminates in the completion of an underwriting model (the "Two Pager") for each loan in the pool. The asset manager will review all of the documents contained in the issuer's loan file, including the rent roll, financial statements, property budget, appraisal, environmental report, property condition report, major tenant leases, management agreement, deeds, notes, mortgages, etc. Using these documents, the asset managers will develop their own underwriting view on each asset, which is documented on the Two Pager. This view will include loan comments, collateral comments, valuation comments and a 10-year pro forma projection of the loan and property cash flows. Site Inspections The site inspection team gathers real time market feedback on the property collateralizing the loan. Our site inspectors visit each property in a deal to confirm its occupancy, rental rates and condition. They will also identify and visit at least three properties that compete with the subject property and outline the basic terms of comparable leases at these properties. Because several months can pass from the time an issuer makes a loan and the time at which it is securitized, material changes at the property can occur. Some of the most significant discrepancies revealed in the due diligence process are identified in the site inspections. Once the site inspection report is completed, it is passed along to the asset manager for review and incorporation into the Two Pager. Depending on the information gathered in LNR's asset underwriting and site inspection process, the Company may ask that specific high risk mortgages be excluded from the pool, a request frequently granted by the sponsors. Legal Review of Trust Documentation LNR will work with the issuer to develop sound documentation governing the Trust that is formed to hold the securitized loans. Legal review and comments on the deal's Prospectus and Pooling & Servicing Agreement ensure that the Trust runs smoothly and that the master servicer and LNR as the special servicer will be able to act quickly and effectively if a loan becomes delinquent. Once all the Two Pagers with regard to a mortgage pool are completed, the most critical information is consolidated into a summary "rollup" schedule. This schedule, the Two Pagers themselves and other key documentation on each asset (i.e. maps, photos, etc.) are then compiled into "red books" for use in a "round table" discussion of the deal with LNR management. In the round table discussion, management and the asset managers discuss the merits of and concerns regarding each loan and collectively reach a final conclusion on the underwriting for that particular loan. The results are then compiled to form a final indication on the value of the bonds to be purchased. An investment summary ("greenbook") is then prepared for LNR's senior management. The greenbook provides summary statistics on the deal, expected capital requirements and projected returns. It weighs the positives and negatives of the investment and provides Two Pagers, pictures, and maps for the five largest loans and the five highest risk/highest projected loss loans in the deal. Before any investment is funded at LNR, the entire corporate senior management team must sign the greenbook, acknowledging their review and authorization of the investment.  |
