The 3 Fundamentals of CRE Debt Management

Defining "debt management" in commercial real estate (CRE) is one of the most complex yet fascinating challenges in building software tailored to the industry. While every real estate firm manages debt in some capacity, the processes and responsibilities differ widely. Some firms rely on executives for this function, others delegate it to asset managers, and still others have dedicated finance teams overseeing debt portfolios.

Typically, these processes evolve as ad hoc solutions to address specific challenges. Need to access loan documents? Set up a file system. Thinking about a disposition? Run a one-off prepayment calculation. Tracking lender compliance? Create a spreadsheet. While these approaches work, they often lack integration and scalability, limiting their effectiveness as best practices.

Unlike asset management, which has well-established practices and transferable methodologies, CRE debt management often lacks standardization. However, after observing the debt management strategies of numerous firms, I’ve identified three key capabilities that can serve as a foundation for effective debt management. These capabilities build on one another and can be implemented progressively, creating a structured approach to managing debt portfolios.

1. Decision-Making Capability

The cornerstone of any management practice—be it asset management or debt management—is enabling informed, timely decision-making. In debt management, this requires providing accurate, readily accessible information to the right people at the right time.
To establish this capability, focus on these critical elements:

• Quick Access to Loan Information: Develop detailed loan abstracts and link key data points back to the original loan documents.
• Updatable Reference Calculations: Create calculation tools for frequently referenced data, such as loan cash flows, prepayment penalties, financial covenants (DSCR, Debt Yield), and supportable loan amounts.
• Controlled Access Systems: Implement systems to manage who can access loan data. This could range from a secure drive with user permissions to a dedicated debt management platform.

By mastering this foundational capability, your firm can ensure that decision-makers have the tools they need to act efficiently and accurately.

2. Loan Administration Capability

Once you’ve established control over loan information, the next step is handling the increased complexity of more sophisticated debt structures. This requires streamlining administrative processes to manage the additional burden effectively.
Key components of this capability include:

• Lender Compliance: Develop systems to collect deliverables, maintain calculation workbooks, review compliance packets, and submit them on time.
• Loan Management: Track construction loan draws, including request details, amounts, required deliverables, and approvals.
• Debt Valuation: Depending on investor expectations, you may need to calculate and maintain valuations for your debt portfolio. Setting up these calculations initially requires effort, but ongoing maintenance is straightforward.

Building these administrative processes ensures that your firm can handle the complexities of high-touch debt structures without sacrificing efficiency.

3. Strategic Management Capability

With decision-making and administrative capabilities in place, the final layer is strategic management. This involves proactively optimizing your debt portfolio to adapt to changing market conditions and maximize efficiency.
Strategic management focuses on:

• Portfolio Analysis: Evaluate your debt portfolio holistically rather than making decisions on an asset-by-asset basis. For instance, assess the impact of a portfolio-level hedge on projected debt costs or how new financing affects overall debt yield.
• Debt Optimization: Identify ways to restructure debt to reduce costs, such as reallocating debt to properties that qualify for lower rates or leveraging credit facilities and lines of credit.

This capability allows your firm to stay ahead of market trends and position itself to capitalize on opportunities, ensuring the most efficient use of financing.

Summary

The commercial real estate industry needs standardized best practices for debt management. Without them, firms risk inefficiencies, lack of control, and missed opportunities for cost savings. By implementing the three key capabilities—Decision-Making, Loan Administration, and Strategic Management—your firm can establish a scalable framework for managing debt portfolios effectively.
This structured approach not only improves day-to-day operations but also positions your firm for long-term success in the dynamic CRE market.