The interest rate cut cycle initiated by the Federal Reserve (Fed) will have a positive impact on commercial real estate lending. CRE lenders will leverage the Fed rate cuts to expand their loan books by offering various types of loans to CRE entrepreneurs. However, they must ensure that loans do not become non-performing assets (NPAs) and for this, prioritizing credit risk management is the key.
As a seasoned and leading CRE Lender, AVANA Capital drives industry growth and job creation by offering short-term and long-term credit to CRE entrepreneurs. At the same time, we ensure that investors and lending partners earn risk-adjusted returns regularly.
In this blog, we discuss the importance of credit risk management and how AVANA protects investor wealth and delivers higher returns through prudent due diligence.
Why is Credit Risk Management Essential in Commercial Real Estate Lending?
In the CRE sectors, dynamics change at frequent intervals. The changing variables change the possibility of a borrower meeting his or her financial obligations timely and fully. CRE lenders avoid and mitigate potential losses by prioritizing credit risk management.
Their credit risk management process focuses on the identification, assessment, and mitigation of various risks associated with loans secured by commercial properties. Experienced CRE lenders like AVANA emphasize mitigation of risk arising due to various factors – economic factors, market volatility, and borrower-specific issues.
How AVANA Ensures Prudent Credit Risk Management?
AVANA mitigates credit risks and protects investors’ wealth by following 8 basic principles. We are discussing these principles that help us deliver risk-adjusted returns to investors consistently.
1) Credit Discipline
We manage and prioritize credit risk management by implementing clear policies. These policies help our team members assess each type of hospitality loan stringently. The focus on mitigating policy exceptions ensures that AVANA mitigates credit risks by investing only in stable and reliable CRE loans.
2) Niche Specialization
AVANA Capital has been funding hospitality projects for over 22 years. We have developed niche specialization by offering various types of hospitality loans to SMEs in the hospitality sector. Our specialized experience enables us to invest in profitable hospitality projects without undertaking a higher level of risk.
3) Risk Control
Members of our sales, underwriting, and operations team focus extensively on the identification and mitigation of risks. In addition, our robust underwriting process prevents borrowers from violating the terms and conditions of the loan agreement. Our prudent 7-step underwriting process plays a crucial role in mitigating credit risks.
4) Market Inefficiency
Trends and dynamics in the commercial real estate lending sector change frequently. Our expertise places us in a position to find opportunities in this market inefficiency. We have built a reputation of prudently funding hospitality and commercial real estate projects, while taking advantage of the market inefficiencies.
5) Macro Forecasting
Unlike other CRE lenders, AVANA prioritizes ground-level information over macro-forecasting, when evaluating CRE projects and screening hospitality entrepreneurs. Our loan officers ask specific questions to the CRE entrepreneur to know how he or she has weathered terms in the past. These questions help them collect both good and bad information about the borrowers, which is essential to assessing credit risks prudently.
6) Timing the Market
When considering hospitality loan requests, most lenders consider existing and emerging trends. However, AVANA mitigates credit risks by avoiding the practice of predicting market trends. We identify and eliminate risks by examining real-time information like the entrepreneur’s operating experience, financial capability, and cash flow position.
7) Lockstep of Purpose and Profit
AVANA, like other commercial real estate lenders, believes in delivering higher returns to investors and partners. However, we differentiate ourselves from other lenders by complementing profit with purpose. When funding a project, we check if it contributes to the progress of communities in the USA. For instance, we prioritize projects that foster job creation and drive positive social changes.
8) Alignment of Interest
AVANA supports a 90%/10% investment structure. We fund 10% of the commercial real estate project, while investors fund the other 90%. The alignment of interest ensures that we make profits only when our investor gets higher returns on their investment.
Conclusion
The rate cuts announced by the Fed will increase the number of CRE deals significantly. CRE lenders will leverage the rate cuts to raise funds for construction and expansion projects. AVANA meets the varying funding needs of CRE entrepreneurs by offering a variety of tailored loan products. However, we focus extensively on protecting investor wealth while funding new projects. Our robust credit risk management framework ensures that we identify the most suitable projects that remain unimpacted by market fluctuations and industry trends.
About AVANA Capital
AVANA Capital is a leading hotel construction financing company with over 20 years of experience in hospitality and commercial real estate financing. We meet the varying financial needs of Hospitality entrepreneurs by providing a variety of loan products—construction loans, commercial bridge loans, and SBA 404 loans. We have launched programs that help CRE entrepreneurs accomplish goals like brand acquisition, brand repositioning, and brand conversion.
Want more information about our credit risk management process? Contact us.
