Tag: Lease Risk

Lease Structure: How Your Bank May Be Creating More Risk

Lease Structure In Commercial Lending Risk

It is a long held precept in banking that when lending on a commercial property, the majority of lease terms should extend past a loan’s maturity. For example, if most of the leases are three years in term, then a bank will often only want to make a three-year loan with the belief that the contractual string of lease cash flows will mitigate credit risk. Not only may this logic be flawed and have no basis in empirical evidence, but creating a shorter loan term to match the leases may actually increase the risk of the loan.

 

Judging Leasing Risk in Bank Commercial Real Estate Loans

Real estate lending risk

In loan pricing and structuring, our loan trading and hedging desk often sees dozens of loans per day. We look at loans from banks all across the nation, including our own, and one area that could be improved is the quantification of lease risk in commercial real estate. Unfortunately, there is not an industry accepted methodology for quantifying the risk, but we would like to start to put forward a couple metrics.

 

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