Presented By: Steve Cohen, Executive VP Sabadell United Bank

Presented By: Steve Cohen, Executive VP Sabadell United Bank

Plentiful Cheap Loose?

Commercial Bank failures 465 during The Great Recession Primary cause Real Estate sector ADC considered the most risky Geography played a role

1. Geographic Location Played a Significant Role in Financial Performance. 2. Implemented More Conservative Growth Strategies 3. Implemented Prudent Risk Management Practices and Limited Speculative Lending, Loan Participations, and Out-of-Area Lending. 4. Posted Lower Level of Non-Current Loans and Losses Associated with ADC Loans. 5. Maintained Stable Capital Levels and Had Access to Additional Capital If Needed. 6. Relied on Core Deposits and Limited Net Non-Core Funding Dependence. 7. *Costar review of FDIC Office of the Inspector General

Fundamentally, Commercial Banks make money by Accepting Deposits and Making Loans

Making Loans that get repaid. The key Risk Mitigation

We want to be paid on time every month Repayment Risk We want to paid out at the end of the loan Default Risk What things might threaten either of these objectives?

Broker Borrower Mortgage Banker Direct Construction Loan Application/Package Correspondent Bank

Initial Review Detailed Analysis/ Underwriting Structuring the Loan Construction Loan Application/Package Risk Parties Construction Costs Value at Completion Proposal and Recommendation Loan Funds Borrower's Credit Global View of Loan Transaction Source/Certitude of Repayment Effect on Bank s Portfolio Position Advisability of Finding Participants

Construction Loan Application/Package Initial Review Detailed Analysis/Underwriting Structuring the Loan Approval and Commitment Recommendation to Bank Management Summary of Details and Analysis Application Package Terms and Conditions of Loan Proposal Technical Review of Plans and Specifications Upon Approval Commitment Letter

Initial Review Detailed Analysis/Underwriting Construction Loan Application/Package Structuring the Loan Approval and Commitment Borrower Accepts Commitment Preparation of Legal Document s Loan Closing

Experience of Banking Team Market Knowledge Competition Market Acceptance Use of Third Party Due Diligence Capital

Assessing the Financing Need (i.e. Loan Amount) Loan Term Loan Pricing Loan Conditions Other Requirements

Formal Commitment Letter Satisfaction of Pre-Closing Requirements Documentation Preparation and Review Loan Closing Post-Closing Issues

Loan Closing Monitoring Construction progress Financial Condition of Borrower/Guarantor Leasing Progress Market Conditions Completion and Stabilization Repayment

Periodic Disbursements Construction Inspections Review of AIA Draw Documents and Invoices Surveys and Title Updates Monitoring Rate of Progress Monitoring Funds Necessary to Complete

Entitlement Risk Construction Completion Risk Leasing/Sales Risk Tenant Credit Risk Capital Market Risk Development Risk Pricing Risk Event Risk Valuation Risk Operating Expense Risk Partnership Risk Ongoing Business Risk

Loan repaid through contract(s) to sell Loan repaid through refinance with permanent loan source or other lender Loan repaid by repaid through cashflow generated by income-producing property

Risk of obtaining appropriate land entitlements, construction permits, and possibly zoning variances. Banks don t historically accept this type of risk (LTV constraints, current entitlement perspective)

Materials pricing/availability risk that the cost of materials may change significantly from the original construction budget. Labor Availability- risk that cost of labor may change significantly from the original construction budget. Scheduling risk that planned construction completion could be prolonged due to weather delays, labor disputes, material delivery delays, etc..

Insufficient Funds-risk that increased costs (materials, labor, scheduling, etc.) and insufficient contingency budget/guarantor liquidity will prevent project from being completed. Business or Contractor Failure- risk that project will be delayed due to changing contractor or that project could fail to be completed. Vandalism/Destruction. Death of key individual.

Underwrite Developer Experience Loan Requirements/Covenants Fixed Price Contracts Plan and Cost Reviews Payment and Performance Bonds Contingency Budget Line Item

Risk that forecasted absorption (leasing or unit sales) volume will not be realized. Risk that early termination clauses would be invoked or that the property becomes encumbered by a long-lease with below-market rent escalation provisions (frequency and/or amount of increase). Risk of a market-driven restructure of leasing or sales commission rates.

Assessment of Market Absorption Loan Covenants Bank Approval Of Leases And Lease Documents Pre-Sale Contract/Pre-leasing Agreements Encourage Developer To Stagger Lease Expiration Terms

Risk that pre-lease tenants and/or tenants industry segment is negatively impacted during development.

Encourage Developer To Diversify Tenant Mix Underwrite Financial Wherewithal Of Tenants Including Credit And/Or Bond Ratings

Interest Rates risk of a significant change in interest rates during the development period. This could affect cost of construction or, in the case of a condominium project, the buyer s ability to obtain suitable purchase price financing. Alternative Investment Risk risk that investor allocations or rates of return for alternative investments will change resulting in shifts in capitalization and discount rates.

Interest Rate Risk Mitigation Forward commit take out loans Swap contract for mini perm portion of bank loan Pre approve and rate lock individual end users/buyers Alternative Investment Risk Require entity equity contribution up front Require contingency/operational reserves on deposit

Supply Risk risk that unanticipated competitive supply will enter the market before lease-up or sellout is achieved resulting in short-, mid-, or long-term concessions, absorption, pricing, etc. Real Estate Cycle Issues risk that rental rates may be negatively affected by changes in market dynamics.

Supply Risk Pre leasing requirements (DSCR considerations) Market Feasibility Reports Assess Potential Competitors In Terms Of Land Of Entitlement And Zoning Assess Potential Competitors by Examining Projects in Permitting Real Estate Cycle Issues Pre leasing requirements (DSCR considerations) LTV, DSCR and NOI stress testing

Risk of a material physical, economic, or other event occurring that significantly impacts asset operations value. Weather, discovery of previously unknown environmental contamination, exodus of major employment providers, and terrorism comprise a sampling of such events.

Insurance (P&C, Terrorism, etc.) Assess Financial Strength of Borrower/Guarantor to Withstand Event Shock Comprehensive Due Diligence with Reliance Coverage (E&O coverage) from third party providers to mitigate unexpected environmental, legal (title, survey) or physical (soil, water) discoveries

Risk that a lack of applicable, current market data exists to accurately value the subject property. Risk that a lack of competency exists with the appraiser engaged to specifically address issues of property geography, valuation analytics, market research, etc.

Only Use Appraisers Who Have Acceptable Credential And Experience Require Appraisal Review by Appropriately Credentialed Peer

Risk of a significant change in one or more fixed or variable expense categories such as insurance, real estate taxes, etc.

Require Reserves Use of Professional Property Management Companies Availability of Master Policy Property Insurance

Risk that accompanies any ownership structure where ownership is less than 100% due to a myriad of factors regarding control, revenue distributions, etc.

Verify Prior Partnership Ventures Require Copies Of Bylaws/Operating Agreements Require Guarantees From All Owners Understand Priority Of Cash Flows In Terms Of Preferred Returns And Distributions (What Are The Incentives)

The Happiest Day Of A Boat Owner's Life Is The Day He Bought His Boat, The Second Happiest Day Is The Day He Sells It The Happiest Day Of A Banker s Life Is The Day He Originates A New Loan The Second Happiest Day Is The Day The Loan Is Fully Repaid

Questions?