Rationale

S&P Global Ratings' ranking on Rialto Capital Advisors LLC (Rialto) is ABOVE AVERAGE as a commercial mortgage loan special servicer. On May 12, 2020, we affirmed the ranking (see "Rialto Capital Advisors LLC Commercial Mortgage Loan Special Servicer Ranking Affirmed; Outlook Is Stable," published May 12, 2020). The outlook for the ranking is stable.

Our rankings reflect Rialto's:

• Experienced senior leadership.
• Sound audit, compliance, and control environment.
• Well-defined and effective borrower request, loan workout, and real estate owned (REO) procedures and process flows.
• Active participation in the commercial mortgage-backed securities (CMBS) market as a B-piece buyer (through its affiliate).
• Good leverage of a proprietary special servicing technology system.
• Comprehensive employee training and development.
• Modest, but growing track record of special servicing defaulted CMBS loans and REO assets.

Since our prior review (see "Servicer Evaluation: Rialto Capital Advisors LLC," published Sept. 6, 2018), the following changes and developments have occurred:

• Funds managed by Stone Point Capital, in conjunction with management, acquired Rialto Capital Group Holdings LLC (Holdings), the entity that owns Rialto and its affiliated investment operations, Rialto Investment Management LLC (RIM), from Lennar Corp. (Lennar) for $340 million.
• Rialto's named CMBS special servicing portfolio increased to 121 transactions, comprising $106.7 billion in unpaid principal balance (UPB), up from 92 CMBS transactions aggregating $85.4 billion in UPB.
• The company established its own cloud-based information technology infrastructure and security team and has completed transition of infrastructure services and migration of the financial management and human capital management platforms from Lennar.
• Rialto relocated its headquarters from Lennar's office near the Miami airport to a new downtown Miami location.
• CMBS loan asset management policies and procedures were updated in April 2019.
• Staffing rose considerably with reported full-time employees (FTEs) increasing nearly 40% to 78 compared with 56.
• Rialto's active CMBS portfolio increased to $2.5 billion (176 assets) as of Dec. 31, 2019, from $1.4 billion (96 assets).
• In October 2019, Rialto hired a new director of internal audit and risk management with more than 20 years of experience, a position reporting directly to the chief financial officer.
• The company engaged a major accounting firm in June 2019 to serve as its outsourced internal audit function, working alongside the recently hired director of internal audit.

Rialto maintains a disaster recovery and business continuity plan, including response procedures to address operational disruption. The company recently implemented its plan due to the coronavirus: COVID-19. Management reported that there were no disruptions to the company's operations or data facilities and that as of the date of this report all of its employees are working from home.

Outlook

The outlook is stable. Rialto's named CMBS assignments have increased in tandem with its affiliates B-piece investing in CMBS 2.0 transactions (i.e., deals issued after the 2008 financial crisis). We believe the previously unanticipated volume of defaulted loan activity arising from the economic difficulties faced by borrowers emanating from the COVID-19 pandemic could present operational challenges to Rialto in the short-term. To that end, management has indicated that its original 2020 business plan contemplated adding approximately 20 new positions and it has accelerated its hiring plans in response to newly increased workloads. As a result, we expect the company to continue demonstrating its commitment to investing in staffing, systems, and other resources necessary to administer its portfolio consistent with its ranking.

In addition to conducting an on-site meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology (SEAM) data through Dec. 31, 2019, as well as other supporting documentation provided by the company.

Profile

Rialto is the special servicing subsidiary of Rialto Management Group LLC (RMG), which has an established operating history dating back to 2007 when it was founded as a wholly owned subsidiary of Lennar, a leading U.S. homebuilder. RMG has 13 offices (10 in the U.S. and three in Europe) and its Rialto special servicing operation is headquartered in Miami, though some special servicing staff are located in Las Vegas and Atlanta. Rialto also owns Quantum Servicing Corp. (Quantum), which it acquired in January 2014. S&P Global Ratings ranks Quantum as AVERAGE as both a primary and a special servicer of small-balance commercial loans.

On Nov. 30, 2018, investment funds managed by Stone Point Capital LLC (Stone Point; 89.9% ownership), in conjunction with management (10.1% ownership), acquired Holdings, the entity which owns Rialto and its affiliated investment operations, RIM, from Lennar for $340 million. Stone Point is a private equity firm, focused on financial services and asset management, based in Greenwich, Conn. Stone Point has raised and managed eight private equity funds with aggregate committed capital of more than $25 billion.

Rialto's special servicing assignments are largely obtained from its affiliate, Rialto Capital Management LLC (RCM), which is wholly owned by RIM and indirectly wholly owned by Holdings. In recent years, RCM has also been one of the most active CMBS B-piece buyers and, according to Trepp, it obtained an approximately 24% market share in 2019. As a result, as of Dec. 31, 2019, Rialto was named as the special servicer for 121 CMBS trusts, totaling $106.7 billion in UPB as well as a $470 million commercial real estate collateralized loan obligation (CRE-CLO) with 26 loans. According to the Mortgage Bankers Assn., Rialto is the fifth largest special servicer as measured by its named appointments.

As of Dec. 31, 2019, Rialto actively managed a $2.48 billion total special servicing portfolio, including 151 loans approximating $2 billion and 107 REO loans containing 170 REO assets, with a reported UPB of nearly $500 million (see table 1). We note, however, that all but one of the 78 small balance non-CMBS REO loans (136 properties) are reported with no UPB. The group is also responsible for managing a $429 million mezzanine loan portfolio. Although Rialto continues to resolve the remaining balance of the legacy portfolio of small-balance non-CMBS collateral, CMBS comprises the vast majority of the value of Rialto's active portfolio UPB. In particular, Rialto's active CMBS collateral in special servicing (147 loans; 29 REO loans containing 34 REO properties) totaled $2.45 billion.

Since 2010, Rialto has commenced the workout and oversight of more than 11,000 nonperforming and distressed real estate loans totaling over $6 billion in UPB (mostly small-balance) derived from RCM's investment activities. RCM has raised $8 billion in equity capital that it has deployed across various funds and separate accounts that invest in newly issued CMBS B-piece investments, distressed debt, value-added property investments, and high-yield debt/preferred equity investments. As of Sept. 30, 2019, RCM managed $5.1 billion across several private equity funds, four separate accounts, and a non-traded real estate investment trust (REIT) for which it acts as a subadvisor.

Table 1

Management And Organization

The management and organization subranking is ABOVE AVERAGE.

Organizational structure, staff, and turnover

RMG and its operating subsidiaries have approximately 232 FTEs as of Dec. 31, 2019. Its CEO is an industry veteran with more than 40 years of experience. The management team includes executives with extensive experience in commercial and residential real estate finance, CMBS, loan workouts, asset repositioning, capital markets, land development, and construction management.

The Rialto asset management and servicing unit has approximately 78 staff members that are involved in special servicing. The unit is headed by a managing director with more than 25 years of experience, supported by a team of five finance and administrative associates. The managing director oversees an asset management platform that is divided into the following three areas:

• Performing CMBS (36 FTEs), which handles non-transfer borrower consents, as well as surveillance, CMBS compliance, and investor reporting for the CMBS portfolio;
• Loan workout (18 FTEs), which handles CMBS loan workouts, as well as the monitoring of mezzanine and floating-rate loans, and loan workouts associated with RCM's investment funds; and
• REO asset management (18 FTEs), which manages and liquidates CMBS and fund-owned REO assets.

Management has indicated that its 2020 business plan originally contemplated adding approximately 20 new positions throughout the year. Given the anticipated widespread defaults resulting from COVID-19, it has accelerated its hiring plans. It further expects to redeploy other experienced workout personnel from other areas of its investment platform as transfer volumes dictate.

Not included in the aforementioned headcount is the primary servicing unit, Quantum, which has eight staff members and reports to the managing director that oversees performing CMBS. This group handles RCM's non-CMBS loans, including small-balance, mezzanine, and floating-rate loans.

Rialto's senior managers average approximately 21 years of experience (see table 2), which is down somewhat from the 25 years reported at our prior review. Middle managers average experience level increased marginally to 16 years from the 15 years reported at our prior review. Special servicing asset managers average 14 years of industry experience, and staff average five years of experience. While we consider these levels to be adequate, they are below the average of higher-ranked peers.

Table 2

During 2019, Rialto reported an 8.3% employee turnover rate, one of the lowest amongst CMBS special servicers that we rank and well below the 48.8% level reported during 2018. Management indicated that the high level of turnover during 2018 was largely attributable to the wind-out of the FDIC and small-balance nonperforming loan (NPL) programs and includes some staff that transferred to other Rialto affiliates. At the same time, Rialto reported its number of FTEs rose 30% during 2019, as management added personnel to support the continued growth in its CMBS platform.

Training

Rialto provides its staff with ongoing formal and informal training opportunities. The company targets 40 hours of training per employee per year. Average training approximated more than 90 hours in 2019, which exceeded company targets and its ranked peers. As noted below, however, a substantial component of these hours is informal on-the-job training, including weekly asset review meetings hosted by the managing directors in loan workout, REO, and CMBS special servicing.

Training and development is part of the annual employee performance evaluation process. Training formats range from live classroom and WebEx training to "lunch and crunch" sessions. The classroom training materials are housed on Rialto's portal, which is available to all associates for reference. Other highlights include the following:

• New employees must review company policies and procedures manuals with managers as part of the onboarding process. Employees also attend annual training seminars to review the policies and procedures to ensure compliance.
• Training focuses on building in-depth knowledge and practical experience in all aspects of real estate investing and development, finance, asset management, and loan workout.
• Interactive training/learning forums are hosted by external and internal subject matter experts on a regular basis to inform Rialto staff of industry best practices, and to ensure compliance with the latest regulatory requirements.
• All asset managers in loan workout, REO, and CMBS special servicing attend weekly review meetings with the managing directors of those service areas, which serve as informal training sessions to transfer knowledge across the company and provide guidance to junior associates.
• RMG established a two-year rotational analyst program in 2015 designed to attract talent, train across multiple departments, and increase entry-level staff. The rotational program, which recruits four to six individuals annually, is modeled off of a similar endeavor that management established at a previous servicer. At the end of the rotation, each analyst selects which department to join in a permanent role.

Systems and technology

We believe Rialto has adequate systems to efficiently and effectively manage its loan and property portfolio. Rialto continues to implement new applications and grow its platform and the data available within its framework. Key features of the technology platform include the following:

Servicing system applications 

• The technology department is led by a seasoned chief information officer who oversees an information technology (IT) organization of 12 staff members along with an additional 16 consultants.
• RCAMS is a cloud-hosted asset management and servicing system that also provides integrated loan servicing and reporting throughout the loan's life. The company owns the rights to the code and license for its own internal use and that of its affiliates. System enhancements are done in collaboration with Infosys Ltd., the license holder.
• RCAMS is designed to handle complex multiple loan, obligor, and property asset structures. RCAMS has multilanguage, multicurrency, and multidate functionality. Version updates to provide system enhancements occur throughout the year.
• The RCAMS asset management module tracks cash flow projections, litigation, asset valuation histories, business plans, and commentary regarding asset status and workout strategies. It also provides a dashboard and real-time notifications to help asset managers with day-to-day responsibilities. Enhancements to automate business plan generation within the application are expected in the near-term.
• Servicing contracts and core loan documents are imaged and captured in RCAMS and accessible from all Web browsers through secure cloud-based hosting.
• TreppPort serves as a central repository for loan, property, and portfolio information, and is utilized for surveillance, risk management, reporting, and document management of performing CMBS loans.
• Yardi provides integrated property management software and is used for REO asset management in conjunction with NetSuite, which provides a cloud-based fully integrated system supporting general ledger, accounts payable, and invoice processing.
• Appian business process management and workflow automation software is used to create standard and controlled processes and applications within CMBS operations, performing loan consent approvals and other processes across the company. Its integration with RCAMS and TreppPort provides reporting and customizable dashboard capabilities.
• Power BI and Microsoft Azure (Azure) provide a centralized data platform, which brings together proprietary data, market data, and third-party data to enable reporting, analytics, and performance tracking across all business functions.

Disaster recovery and business continuity 

Rialto's disaster recovery and business continuity plans historically leveraged Lennar's IT infrastructure. Since its Nov. 30, 2019, separation from Lennar-provided services, Rialto's operating platforms are now deployed in the cloud or hosted by software-as-a-service providers with their own business continuity and disaster recovery plans. Additionally:

• Rialto's offices in New York, Atlanta, Tampa, and Miami can each be used as primary operating facilities.
• Network drives for each location are backed up locally and replicated in the Azure cloud data center. The target recovery time for investor reporting and all other servicing functions is one to two business days. We note that while Rialto's documented business continuity plan is extensive and well-written, it has not yet been updated since the separation from Lennar. Nonetheless, management noted that all of the applications used have their own disaster recovery plans and all employees have company laptops allowing remote access via virtual private network (VPN) login.
• RCAMS is deployed on a cloud server hosted by Infosys.
• Prior to its separation from Lennar-provided services in May/June 2019, a series of disaster recovery tests were performed on four key platforms: RCAMS, JD Edwards Enterprise Reporting and Planning, Essbase, and the treasury management system. Based on the test scope, which included core functions and system recovery, management indicated all results were successful. We note, however, that of the aforementioned platforms, Rialto only currently uses RCAMS.
• Management reported that, as of the date of this report, all Rialto associates are able to function remotely. All of its cloud-based applications are accessible securely via internet connection, and its file servers are accessible via VPN. In addition, Rialto associates are able to take phone calls directly on their laptops or mobile devices.

Cybersecurity 

Rialto maintains procedures and controls to provide cyber, computer, and mobile device security. It employs extensive enterprise security controls for access to its systems and data (least-privilege access, frequent password updates, complexity requirements, multifactor authentication for remote access, etc.). As it pertains to cybersecurity, Rialto has seven external connections to the internet across different offices, and they are each governed by redundant firewalls. Rules are configured to allow traffic out and discard inbound traffic, while software is used to detect and remove viruses and to detect threats or security issues on the domain and public-facing servers.

The company has a cyber-insurance policy and also has access to legal counsel for cybersecurity matters. At present, the company sends its employees phishing e-mails annually, which we have observed is less frequent than most servicers we rank.

Third-party penetration testing is to be conducted annually; however, the latest test was conducted in November 2018. Management reported that it expects to engage a third-party in 2020 to assess its infrastructure and perform an annual risk assessment, which will include phishing testing, scans, and external penetration testing.

Internal controls

In our view, Rialto has a solid control framework for a CMBS special servicer, including well-documented policies and procedures and a dedicated compliance department that provides quality assurance within the business. As Rialto has separated from Lennar, we believe it has also enhanced its audit program with the addition of an internal controls assessment, which was completed in January 2020. An annual Regulation AB (Reg AB) attestation is also performed. Additional notable features are described below.

Policies and procedures 

Features of the company's policies and procedures framework include the following:

• Manuals are available to all staff via RCAMS.
• Policy changes are reviewed and updated at the department level as required and at least annually, corresponding to the company's annual compliance reporting.
• Policy updates are validated via version controls, and specific sections are labeled as "Revised" or "Issued" and contain the date of issuance or revision.
• As previously noted, new hires must review with their manager the applicable policies and procedures as part of the onboarding process. Further, employees attend annual training seminars where policies and procedures are reviewed.
• The CMBS manual contains sections pertaining to compliance and quality control, loan servicing and administration, asset management, REO management and administration, surveillance, and training. We believe the manual provides sufficient detail--including RCAMS screenshots, process flows, and exhibits--to guide the analyst or asset manager through most special servicing processes.
• Rialto has also enacted policies limiting access to specially serviced loan data to appropriate individuals based on job function, and prohibits access to associates that are responsible for the acquisition and monitoring of RCM CMBS bond positions. A review of user access rights is performed semiannually.

Compliance and quality control 

Internal quality controls include a robust process to maintain compliance with various servicing agreements. Features include the following:

• Pooling and servicing agreement (PSA) summaries are abstracted and are available on RCAMS.
• There is a compliance matrix of the relevant provisions of the documents and the responsible department and deliverable.
• A weekly compliance tracker report is generated through RCAMS to track and document compliance, identify non-compliance with past-due requirements (for asset status reports, property inspections, internal valuations, and appraisals, among other items), and raise issues of noncompliance to senior management.
• The compliance department performs quality assurance testing (monthly, quarterly, or semiannually), depending on the servicing criteria associated with Reg AB requirements.
• Other control measures include requiring the compliance director and the managing director to review all CMBS asset approval memoranda (AAM) to ensure proposed workouts are consistent with servicing standards and PSAs.

Internal and external audits 

Since our last review, Rialto hired a director of internal audit and risk management, with more than 20 years of industry experience, who reports independent of the business to the chief financial officer of RMG. The audit director will perform risk assessments and internal controls testing in order to provide continuous monitoring of the company's control environment.

Rialto engaged a major accounting firm in June 2019 as an outsourced internal audit function of Rialto as a special servicer. The firm will work alongside the director of internal audit and risk management to continuously monitor and test the control environment. The accounting firm performed an initial objective review of Rialto's policies and procedures, business processes, IT environment, and internal controls. That review, which covered the period from Jan. 1, 2019, to Nov. 30, 2019, was completed in January 2020 and identified no exceptions within the 54 controls tested across the 16 in-scope processes.

A Reg AB attestation for 2018, which was completed by an external audit firm during the first quarter of 2019, did not contain any material instances of noncompliance. However, during the summer of 2019, Rialto discovered that the regional accounting firm that performed the review was not registered with the Public Company Accounting Oversight Board as required by the regulations. As a result, Rialto engaged the major public accounting firm previously referenced to perform a subsequent 2018 review, which also did not contain any material instances of noncompliance. The 2019 Reg AB review, which was also performed by the same major public accounting firm, similarly did not note any material instances of noncompliance.

Vendor management

Policy highlights include the following:

• Security standards and procedures must be adhered to when company associates select vendors.
• Vendors must comply with the company's data classification and handling policy.
• Handling procedures associated with detecting, resolving, and reporting breaches and incidents must be documented.
• Vendors must provide the company with business continuity plans to address potential service disruptions.
• A documented process is required to be established to monitor vendor compliance with service-level agreements annually.

Insurance and legal proceedings

Rialto has represented that it maintains adequate directors and officers, as well as errors and omissions insurance coverage that is in line with the requirements of its portfolio size. As of the date of this report, management indicated that there were no material servicing-related pending litigation items.

Loan Administration

The loan administration subranking for commercial mortgage special servicing is ABOVE AVERAGE.

Since 2010, management reports that Rialto has commenced the workout of billions of dollars of commercial real estate assets, including distressed debt, and to a lesser extent, CMBS assets. However, RCM has been one of the most active B-piece buyers of recent new-issue CMBS transactions during the past several years, leading to Rialto becoming the named special servicer on 121 CMBS transactions (6,780 loans, with a UPB of $106.7 billion). Its active CMBS special servicing portfolio (see table 3) includes 147 loans with $2 billion in UPB and 29 REO loans (containing 34 REO properties) with $479.2 million in UPB.

Table 3

Loan recovery and foreclosure management

We believe Rialto takes a disciplined approach to resolving nonperforming loans. It focuses on understanding the borrower's financial condition, the real estate collateral's value, and the likelihood of reaching a resolution with the borrower.

The UPB of Rialto's CMBS loan resolution activity has increased significantly in recent years in conjunction with the portfolio's growth (see table 4). Rialto also has substantial foreclosure experience nationwide, albeit primarily on small-balance collateral (activity not included in table 4). Most of its resolutions since 2017 have been foreclosures and full payoffs, although the servicer has returned several loans to the master servicer and had two discounted payoffs/note sales. Overall, Rialto's average resolution time has consistently ranged between 12 and 13 months since 2016, including 12.3 months during 2019, comparing quite favorably to its peers.

Table 4

Management's target for its loan asset managers to manage 15-20 CMBS loan relationships (on average) is on the higher end for CMBS special servicers we rank. Nonetheless, based upon its Dec. 31, 2019, total portfolio (including non-CMBS properties), average loans per asset manager was approximately 13.7 and average REO properties per asset manager approximated 14.2, each somewhat below target.

The assets are assigned largely based on geographic diversity and the asset size, complexity, and type. Upon assignment, an asset manager will review the file to determine if any guarantor carve-out or issuer representations and warranties breaches have occurred. Within no more than 90 days of CMBS loan transfer, the asset manager develops an AAM (i.e., business plan) for each assigned asset. Rialto requires executed pre-negotiation letters before meeting with a borrower.

All loan resolution options require the asset manager to seek AAM approval from the director of loan workout, the managing director, and the director of compliance; external approvals are sought as required by the applicable PSA.

AAMs must, at a minimum, contain:

• An executive summary of the requested action;
• Details of the loan, relationship, and borrower;
• Analysis of loan exposure, summary of balance, and terms;
• Guarantor information as applicable;
• Collateral description;
• Property operating statement details;
• Explanation of the events that led to the mortgage loan default;
• A discussion of the possible alternatives considered, supported by net present value (NPV) calculations of each alternative;
• Recommendation and substantiation for the workout strategy that will result in the best possible outcome for the certificateholders as a whole; and
• Evidence that all requisite third-party reports have been obtained, and other documentation and approvals have been received before taking title.

REO management and dispositions

We believe Rialto has established solid REO processes and procedures for each phase of the REO acquisition to disposition process. These processes and procedures are described below.

REO asset managers are assigned to each specially serviced loan and collaborate with the loan asset manager throughout the workout process. REO asset managers do not have a gearing ratio based on the number of assets due to the wide range of complexity among properties and the variability of time required to manage them. Staffing levels are assessed, and assets are assigned similarly to defaulted loans (i.e., based on geographic diversity, asset size, complexity, and type).

If foreclosure is the resolution strategy, the REO asset management group actively participates in transitioning a loan to an REO property. A notification process informs all relevant departments that the collateral has transferred from the loan asset manager to the REO asset manager. This includes a pre-foreclosure check list of items that must be provided and actions that must be completed before the transition date.

REO asset managers prepare a detailed REO business plan (within 60 days of taking title) that includes a hold-versus-sell analysis. REO business plans are updated no less frequently than semiannually. For every REO property sale, the REO asset manager must complete an AAM, which includes reasons why the current offer is recommended, and the following details to support the conclusion:

• Property values supported by property appraisal or broker opinion of value,
• Amount of purchase offer,
• NPV analysis,
• Anticipated sale or closing date,
• Confirmation that all legal requirements have been adhered to, and
• Confirmation that the purchaser is not affiliated with Rialto or any interested person, as defined in a PSA.

Table 5 provides data on Rialto's CMBS REO disposition history, which accelerated during 2019, accompanied by what we consider to be a relatively favorable average hold period of 18.5 months. Although the company has liquidated a substantial amount of small-balance REO collateral (vacant land, undeveloped lots, etc.) during the past several years, we note it has limited experience managing and disposing the larger, more complex REO assets typically found in CMBS trusts. Further, the previously securitized loans that were liquidated as REO (as shown in table 5) have largely been of the small-balance variety (average estimated market value of 2019 REO sales transactions was $4.5 million), with an emphasis on limited-service hotels and secondary/tertiary multifamily properties. We do note the increased complexity of the REO assets in the Dec. 31, 2019, active portfolio, accompanied by greater property type diversity, albeit with a continued emphasis on limited-service hotels.

Table 5

REO accounting and reporting

Third-party property managers are provided with a policies and procedures manual as a part of their engagement. The manual provides a general guideline to many of the processes required to manage commercial property and also includes a variety of standard exhibits for reporting.

Third-party property managers must submit a reporting package that contains comprehensive financial information and supporting data to REO asset managers by the last day of each calendar month, detailing the performance of the prior calendar month. Once received, REO asset managers evaluate the report to determine if all expected revenues were collected and deposited, and that paid expenses are in line with the approved budget. After reviewing and resolving any issues, the asset manager certifies and submits the REO reporting package to the REO Operations Group for further review and posting of cash transactions into RCAMS for compliance purposes. In addition, if a property manager has insufficient funds in the REO operating account to satisfy outstanding invoices, advance requests are directed to the master servicer after approval from the REO asset manager.

As its CMBS REO portfolio grew, Rialto began performing property management audits in 2017. The scope of the audits includes testing compliance with the underlying property management agreements--including reviewing leasing procedures and controls surrounding accounts receivables, accounts payable, and cash accounts--and compliance with required insurance coverage. Management reported that eight property management audits were conducted during 2019.

Subcontracting management

Rialto asset managers select and engage third-party service providers from its approved vendor lists, which exist for all major vendor categories, including appraisal and inspection firms, engineering and environmental firms, property management companies, brokerage firms, and attorneys. The company does not engage any affiliate service providers. Rialto maintains a compliance module in RCAMS for its asset managers to formally track vendor engagements. Vendor quality, however, is tracked on a more informal basis.

Performing loan surveillance

Rialto has an eight-person team dedicated to performing loan surveillance on the portfolios where the company is the appointed special servicer. Its responsibilities include:

• Monitoring of individual loan and collateral activity in CMBS portfolios to identify potential issues that may affect future loan performance, including payment default, property performance, tenant rollover, market conditions, and loan covenant compliance, among other factors;
• Utilizing an internal proprietary model to track loan data to create daily watchlists, track payments, establish risk ratings (on a 1 to 5 scale), and perform regular re-underwriting of loans;
• Actively communicating with master servicers to review watchlist items and receive timely updates on loans of concern to mitigate and manage risk;
• Communicating with borrowers and local resources as situations require;
• Reviewing major news sources daily to identify and evaluate tenant and market risks, such as bankruptcies, retail store closures, natural disasters, and oil exposure; and
• Participating in the consent process with the CMBS special servicing team on a weekly basis, which provides a collaborative internal platform to exchange market intelligence as well as share property-level information stemming from the borrower-requested consents.

Borrower requests

Rialto has a 15-person department dedicated to the review process for borrower consent activity on performing CMBS loans. The unit is well-controlled in our view, and is managed by a director who reports to the managing director of special servicing. Highlights include the following:

• Unlike most other special servicers, Rialto generally controls the entire CMBS borrower consent process from initial borrower submission through analysis and completion of a transaction request.
• In addition to analyzing the request at hand, Rialto performs a full re-underwriting of the collateral during all consent reviews in order to re-evaluate the performance of the loan and adherence to the loan documents.
• The review process requires the same layer of internal approval as a specially serviced loan, including approvals from the managing director of special servicing, the managing director of asset management and servicing, and the director of compliance.
• Rialto includes its surveillance department in the consent process, using such reviews as an opportunity to positively affect the performance of the entire collateral supporting the loan. This approach should enhance the performance of underlying CMBS trust collateral, while at the same time could result in slower turnaround times and borrower dissatisfaction, which has been an industry challenge.
• During 2019, Rialto completed 668 borrower requests on loans with an aggregate UPB of $19 billion, including 262 leasing consents, 54 assumptions, and 47 property management changes. Since inception, management reports that it has completed over 4,000 performing loan requests, including assumptions, transfers of ownership interest, modifications, collateral releases, and lease reviews totaling over $107 billion in UPB.

Legal department

Rialto has access to an in-house legal staff of three associates. The legal staff assist with forming special-purpose entities, obtaining powers of attorney, managing custodial relationships, and PSA-related activities. The legal staff report to the general counsel and chief compliance officer. For real estate mortgage investment conduit legal matters and opinions, Rialto primarily utilizes outside law firms. Such counsel is engaged from Rialto's approved attorney list with managing director approval. We believe this is an efficient structure to provide sufficient legal support and guidance.

Financial Position

The financial position is SUFFICIENT.

Related Research

• Rialto Capital Advisors LLC Commercial Mortgage Loan Special Servicer Ranking Affirmed; Outlook Is Stable, May 12, 2020
• Select Servicer List, May 1, 2020
• U.S. Commercial Mortgage Servicers Preparing For Impact From COVID-19, April 3, 2020
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019