Leaping Toward Asset Transparency
A new rent-roll reporting standard promises to improve underwriting and commercial real estate investment management
Reasonable people can disagree about whether specific provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act go too far in regulating financial institutions and instruments, but few would argue with the intent of the law as stated upfront in the 848-page document: “To promote the financial stability of the United States by improving accountability and transparency in the financial system.”
Indeed, transparency of property-level information is key to accurately value a commercial or multifamily investment throughout its lifecycle, including at the origination of a deal and during the ongoing asset management of a deal, and to gauge relative risk.
The mortgage industry has made great strides to promote transparency. The Commercial Real Estate Finance Council (CREFC), with its investor-reporting package, has set the standard for reporting bond, loan and property information for mortgages packaged as securities (CMBS). The U.S. Securities and Exchange Commission (SEC) also requires about 160 fields of this information to be filed regularly and made publicly accessible to investors through its EDGAR reporting system.
The Mortgage Industry Standards Maintenance Organization (MISMO), which is affiliated with the Mortgage Bankers Association, has played a similar role. Its voluntary residential mortgage reporting standards have been embraced by Fannie Mae and Freddie Mac and, as a result, by the industry.
A new commercial MISMO standard expected to be finalized this month provides a mechanism for reporting one of the most critical pieces of information: Rent-rolls for commercial and multifamily properties. By familiarizing themselves with these standards, commercial brokers and property owners can help ensure success for their clients and properties.
Rent-roll data is the Holy Grail of property information. It is crucial to understanding the performance, health and value of an income-producing asset, including its creditworthiness.
Until now there has been no generally accepted industry standard or format for the collection and reporting of commercial and multifamily rent-roll data, making it more challenging to value and transact assets.
The new standard promulgated by the commercial arm of MISMO includes standardized fields for property and financial data. It also provides an easy way to maintain and share the data through widely used, secure, internet-based technology.
This standard is expected to be embraced widely. Fannie Mae, which has actively participated in its development, has already endorsed the new standard for all multifamily loan originations and ongoing asset management.
The hope is that Fannie Mae will use its muscle to drive adoption, and that the commercial mortgage-backed securities market, portfolio lenders and analytics vendors will accept the standard.
The reporting standard was devised over the past few years by MISMO. The organization develops, promotes and maintains voluntary standards for the real estate finance industry to enable consistent loan information to be obtained and exchanged efficiently and securely between mortgage lenders, investors, servicers, brokers, appraisers, analysts, agencies and others.
The new standard was designed to support all types of income-producing property, including office, industrial, retail, multifamily, assisted-living, self-storage, mobile home parks and hotels. About 90 fields in eight data containers make up the MISMO standard for a rent-roll. Specific data fields at the property level include tenant name, tenant-contract rent amount, sales amount for retail, unit number and tenant type, among others.
Data fields developed for the standard were sourced from Fannie Mae as well as multiple lenders, vendors and commercial mortgage market participants, who rely on various rent-roll templates currently used by asset and property managers.
The new standard contains the most commonly used data points and can be viewed online at mismo.org. The process is dynamic, however, and the standard could evolve over time.
Also included as part of the standard is a logical data dictionary with updated rent-roll dictionary definitions, sample XML code for internet-friendly data reporting and sharing, the rent-roll data model (XSD), and business use cases that demonstrate the efficacy of the standard in multifamily, retail and senior housing scenarios.
Resistance to public disclosure of rent-roll information is apparent in some corners, with retail-property participants the most concerned, and players in the office and industrial sector somewhat less concerned. There is fear that disclosure of rent-roll information puts certain parties at competitive disadvantages for negotiating and other purposes.
The argument for transparency is more powerful, however, especially for CMBS. In fact, it’s the borrowers who should benefit. Financing should become cheaper as investors feel more comfortable with the ability to monitor the performance of underlying collateral. And of course, there are always private lenders if disclosure is that big of an issue.
Under the current CMBS reporting standards, borrowers are required to submit rent rolls four times a year for the life of a loan. Compliance is very strong but the formats that are used are inconsistent. Issuers could require borrowers to submit rent roll data using the new MISMO standard, which would reduce costs for servicers, investors and rating agencies.
Going forward, the SEC could choose to make compliance with the new MISMO rent-roll standard mandatory for public securities, and the CREFC investor-reporting package could be updated to include the information, which would provide a mechanism for the SEC to incorporate the data.
With or without Dodd-Frank, wide adoption of the rent-roll standard would be a major leap forward for transparency in the commercial mortgage industry which would translate and help ensure a healthy, robust primary and secondary market for all commercial real estate assets.
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Jim Flaherty is CEO of CMBS.com and the creator of the Backshop loan origination system. He is a trained credit professional with experience installing enterprise underwriting systems for commercial real estate lenders and investors.
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