What are the stages of a commercial real estate loan?

The short answer

A commercial real estate loan moves through four stages. Origination sources the deal and proposes terms. Underwriting analyzes the property and sponsor and ends in credit approval. Closing satisfies the approval's conditions and funds the loan. Servicing administers the loan until it pays off.

Each stage has a different owner, and each handoff carries only what was written down. Whatever stayed in someone's head or inbox is lost at the boundary.

What happens at each stage, and what ends it?

A stage ends at a decision or an event. Knowing the ending condition tells you whether a deal has moved.

What happens in origination?

Origination finds the deal and decides whether it fits. Loans arrive through sponsor relationships, mortgage brokers and repeat borrowers. The originator screens each one against the lender's credit policy: property type, market, loan size, sponsor strength and the lender's existing exposure.

Portfolio limits shape that screen. Interagency guidance on commercial real estate concentrations, described in the OCC's Commercial Real Estate Lending handbook, flags banks whose construction and land loans reach 100 percent of total capital, or whose non-owner-occupied commercial real estate reaches 300 percent of capital after growing 50 percent or more in the prior 36 months.

A deal that clears the screen gets initial sizing against loan-to-value and debt service coverage targets, then a term sheet. Origination ends when the borrower signs it and pays any deposit.

What does underwriting analyze?

Underwriting tests whether the property's income can carry the debt. The OCC handbook lists the factors an income analysis typically considers: historical, current and projected rents, expenses, capital expenditures and vacancy; lease renewal trends; past-due leases; comparable rents and sales; the terms of current leases; and capitalization rates. It expects those factors tested under stressed conditions as well as normal ones.

Underwriting also values the collateral and measures the loan against it. Federal banking rules set supervisory loan-to-value limits, and each bank sets internal limits at or below them.

How does a loan get approved?

The underwriter writes a credit memo that presents the property, market, sponsor, income analysis, risks and mitigants, and the proposed terms. The OCC handbook describes the approval memorandum as the document that gives approvers enough information for a fully informed credit decision.

The memo goes to a credit committee or an individual with approval authority. Approval can match the proposal, change the terms or add conditions, such as a larger reserve or a guaranty. The approved version becomes the commitment letter, and underwriting ends when the borrower accepts it.

What happens during closing?

Closing turns the commitment's conditions into a checklist and works it to funding. Lender's counsel drafts the loan documents. The title company clears requirements, the borrower delivers entity and property documents, tenants sign estoppels, and the insurance agent produces conforming evidence.

The OCC handbook expects the loan document terms to be consistent with the approval document and any later amendments. The closer's job includes proving that consistency, item by item, before the lender wires funds. Closing ends when the loan funds, the mortgage or deed of trust records and the closing binder is complete.

What does servicing involve?

Servicing starts with boarding: setting up payment terms, escrow and reserve accounts, reporting requirements, insurance and tax tracking, and covenant tests from the executed documents. Payments, escrow disbursements and reserve releases follow for the life of the loan.

Monitoring carries the credit forward. The OCC handbook ties the frequency of property reporting to stability. Annual operating statements and rent rolls can be adequate for a property with a few long-term tenants or a stabilized apartment building, while properties in lease-up or with many tenants may warrant monthly, quarterly or semiannual reports. It also describes periodic property inspections and monitoring of real estate tax payments.

Some tasks run on legal clocks. A UCC financing statement lapses five years after filing unless the lender files a continuation statement, and the continuation can only be filed in the six months before the lapse.

What sets the length of each stage?

Origination runs on the sponsor's timeline and the competition for the deal. Underwriting runs on third-party report delivery and the credit committee calendar. Closing runs on its slowest outside party, usually a tenant, a title release or a consent. Servicing lasts until payoff.

The lender controls the start of each clock more than its length. Ordering reports at the term sheet, sending estoppels at commitment and boarding the loan from a clean file move the dates that matter.

How do the stages differ for a construction loan?

A construction loan adds a stage between closing and servicing: construction administration. The loan funds in draws as work is completed, so the lender keeps making credit decisions for months after the documents are signed.

The OCC's Commercial Real Estate Lending handbook describes sound monitoring as monthly reports of work completed, costs to date, costs to complete, construction deadlines and loan funds remaining, with plan changes reviewed by qualified staff or a construction consultant. It flags a large number of change orders as a possible sign of poor planning or construction problems.

The final draw has its own controls. The handbook lists confirming lien waivers or releases from contractors, subcontractors and suppliers, reviewing the final inspection report, and confirming the certificate of occupancy before releasing it. The loan then converts to permanent terms or pays off from a take-out loan.

What changes when a loan is participated or sold?

Participations and loan sales add a fifth handoff, to an investor who never saw the deal. The participant or buyer needs the credit memo, the third-party reports, the executed documents and the servicing history, organized so it can underwrite the loan from the file.

Credit unions face a specific rule. Under 12 CFR 701.22, a federal credit union that originates a participated loan keeps at least 10 percent of the outstanding balance for the life of the loan, and other eligible originators keep at least 5 percent.

A file assembled as the deal closed hands over in days. A file reconstructed later from inboxes and shared drives takes weeks and still leaves the buyer asking questions.

Where do the handoffs lose information?

• 1
  Origination to underwriting

  Informal context drops out: what the sponsor said about the business plan, which assumptions were tested in conversation, and the history of the relationship.
• 2
  Underwriting to closing

  The reasoning behind each condition drops out. A closer who sees only the requirement satisfies its wording, even when that wording misses the risk the condition was written for.
• 3
  Closing to servicing

  Negotiated details drop out: side agreements on reporting, reserve release mechanics and the email history of how each condition was cleared. Servicing rebuilds the deal from executed documents.

How do lenders keep context across the stages?

Write each condition with its purpose. A condition that says why it exists lets the closer tell when a literal satisfaction misses the point, and lets servicing know which covenant protects against what.

Keep one deal record that every stage reads and writes. When the checklist, documents, notes and approvals live in the same place, a handoff changes the owner and leaves the information where it was.

Bring servicing in before funding. A short review of reporting covenants, reserves and payment mechanics while the closing team can still answer questions prevents boarding errors that follow a loan for years.

Prodeal keeps the checklist, documents, notes and an activity log for each deal in one room, and exports the record and closing binder for the servicing team.