Rationale

S&P Global Ratings' ranking on 3650 REIT Loan Servicing LLC (3650 Loan Servicing) is AVERAGE as a commercial mortgage loan special servicer. On Nov. 24, 2021, we affirmed the ranking (see "3650 REIT Loan Servicing LLC AVERAGE Commercial Mortgage Loan Special Servicer Ranking Affirmed; Ranking Outlook Stable"). The ranking outlook is stable.

Our ranking reflects 3650 Loan Servicing's:

• Experienced senior managers, including several who previously held leadership positions at other commercial mortgage loan special servicers ranked by S&P Global Ratings;
• Small staff size and limited operating history as a newer venture;
• Formal training program that supplements on-the-job training;
• Good leverage of a third-party asset management and special servicing system;
• Thorough, though newly developed, internal control environment that is built on a solid framework and includes a well-defined delegation-of-authority matrix and internal audit regime; and
• Limited special servicing resolution track record within the current platform.

Since our prior review (see "Servicer Evaluation: 3650 REIT Loan Servicing LLC," published March 11, 2020), the following changes and/or developments have occurred:

• The head of loan servicing left the company and was replaced by a senior vice president who has significant tenure with 3650 Loan Servicing and its parent company. Prior to taking on the new role, the head of loan servicing was a senior manager at the company and has also held several senior manager positions at Grass River Property LLC, an affiliate of 3650 Loan Servicing's parent company. Previously, the new head of loan servicing was a senior portfolio manager at another commercial mortgage loan special servicer ranked by S&P Global Ratings.
• The named CMBS special servicing portfolio grew to six transactions with 149 loans and approximately $3.8 billion in unpaid principal balance (UPB) as June 30, 2021, from one transaction with 32 loans and approximately $828.0 million in UPB.
• The active special servicing portfolio grew to two assets from zero and has a UPB of approximately $37.3 million as of June 30, 2021.
• An external third party was engaged to conduct internal audits of 3650 Loan Servicing.
• The parent company successfully implemented its disaster recovery (DR) and business continuity (BC) plan in response to the COVID-19 pandemic. Employees were able to work from home effectively utilizing Microsoft Teams and other real-time technology to facilitate communication. Most employees are now working in the office.
• In response to the distress caused by the COVID-19 pandemic and associated lockdown measures, the special servicing team successfully limited transfers to special servicing by proactively reaching out to borrowers to provide assistance. The team also created an updated asset business plan template to analyze and process borrower relief requests.
• 3650 Loan Servicing worked with its vendor to make several improvements to its third-party special servicing system environment, including enhancing the borrower consents form, which now auto-populates and allows approvals within the system.

The ranking outlook is stable. 3650 Loan Servicing has built the infrastructure to be a capable commercial mortgage loan special servicer and has tested its controls and systems through the management of a small portfolio of special servicing assets, as well as its performing loan portfolio. We expect that it will maintain the people, processes, and technology needed to effectively administer a special servicing portfolio consistent with its near-term growth strategy.

In addition to conducting an on-site meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through June 30, 2021, as well as other supporting documentation provided by the company.

Profile

Launched in April 2018, the Miami-based 3650 REIT conducts business through its four operating subsidiaries, which, in addition to 3650 Loan Servicing, include investment management, origination, and underwriting subsidiaries. 3650 Loan Servicing performs asset management, loan servicing, and loan workout and resolution for subsidiaries of 3650 REIT. Collectively, the operating subsidiaries play an integral role in the company's goal of building long-term borrower relationships by maintaining borrower contact from loan closing to maturity.

Three founding partners who maintain all voting rights and seven preferred stock investors own 3650 REIT through 3650 Holdings L.P. The founding partners also own an affiliated commercial real estate equity and property development company, Grass River Property LLC. The two companies share a corporate services unit that provides capital markets, legal, compliance, accounting, human resources, and information technology support.

3650 REIT has a 10-year fixed-rate origination platform and a bridge and event-driven origination platform. It originated $566 million of 10-year fixed-rate loans and $162 million of bridge and event-driven loans in 2020, a slight decrease from the previous year and significantly lower than anticipated due to the drastic slowdown of the commercial mortgage loan lending market caused by the COVID-19 pandemic. Through the first three quarters of 2021, 3650 REIT originated $632 million of fixed-rate and $211 million of bridge and event driven loans.

As of June 30, 2021, 3650 Loan Servicing was the named special servicer on four conduit transactions and two single-asset, single-borrower (SASB) transactions totaling $3.8 billion in UPB backed by 149 loans. 3650 Loan Servicing has additional asset management responsibility, including potential special servicing, for a portfolio of loans from its bridge and event-driven platform and interim fixed-rate loans that it typically contributes to future securitizations. The active special servicing portfolio as of June 30, 2021, included two loans with an aggregate UPB of $37.0 million.

Table 1

Management And Organization

The management and organization subranking is AVERAGE.

Organizational structure, staff, and turnover

3650 Loan Servicing's special servicing team is led by a managing director with more than 14 years of industry experience and 11 years of company tenure. The managing director reports to 3650 REIT's chief operating officer (COO), who has 22 years of industry experience. The COO reports to the three founding partners of the company, who provide oversight over key special servicing decisions per 3650 Loan Servicing's delegation of authority (DOA). The COO and two of the three founding partners have significant experience in leadership positions at other special servicers ranked by S&P Global Ratings.

An important part of 3650 Loan Servicing's strategic business plan is for it to take on more asset management and borrower contact than is typically the case for appointed special servicers on CMBS transactions. In addition to traditional special servicing asset management responsibilities, 3650 Loan Servicing also administers a portfolio of high-touch construction loans in the bridge and event-driven portfolio, which includes cashiering responsibilities. We, therefore, expect that it will need more employees to manage its named special servicing portfolio than other ranked special servicers who do not perform these duties. We also note that many of its employees have several different job responsibilities, and some fill multiple roles including at 3650 Holdings L.P.'s affiliate, Grass River Property LLC.

As of June 30, 2021, 3650 Loan Servicing reported that it had five designated loan asset managers and two designated real estate-owned (REO) asset managers. This includes the head of loan servicing providing a first level of oversight per 3650 Loan Servicing's DOA. In addition to asset managers, the 15-person loan servicing team includes junior personnel that support asset managers on loan resolutions and REO management as well as senior managers who provide additional oversight per 3650 Loan Servicing's DOA. With only two loans in special servicing as of June 30, 2021, the team is well staffed to handle such volume, even though, as previously mentioned, many members of the special servicing team have responsibilities in addition to special servicing.

3650 Loan Servicing's overall average senior manager industry experience is generally in line with other CMBS special servicers ranked by S&P Global Ratings, while the average experience levels of middle managers, asset managers, and staff are lower than peers. Even though company tenure averages include time spent at affiliate Grass River Property LLC, tenure levels are low across all categories (see table 2 for 3650 Loan Servicing's experience and tenure levels) because 3650 Loan Servicing is a relatively new operation with several recently hired staff.

Table 2

Although 3650 Loan Servicing reported no turnover in its initial year of operations in 2019 it reported a relatively elevated turnover rate of 25% in 2020 (including the prior head of loan servicing), though we note that the company has a small staff size and one of the three departures during this time period was an internal transfer. 3650 REIT Loan Servicing had one voluntary departure from special servicing in the first half of 2021, an employee who transferred to the origination department. Despite having a relatively small active special servicing portfolio, 3650 REIT Loan Servicing has hired to replace employees that departed and to grow the team from 13 employees as of yearend 2019 to 15 employees as of June 30, 2021.

Training

3650 Loan Servicing has established a prudent employee training program for a company of its size. A designated training coordinator tracks approved employee training hours on an Excel spreadsheet, and the training requirement and corresponding employee development are discussed during annual performance reviews. Other noteworthy aspects of 3650 Loan Servicing's training program include that:

• Employees must complete 30 hours of training annually. In 2020, 3650 Loan Servicing reported an employee training hour average of 30 hours, in line with the company target. Management indicated that employees averaged 12 hours of training in the first half of 2021.
• Management indicated that external experts and senior managers hold at least one formal training session each month with the staff. Recent topics have included servicing systems, the impact of the COVID-19 pandemic, pooling and servicing agreements (PSAs), and underwriting.
• Employees are encouraged to participate in training and development initiatives offered by different industry organizations including the Mortgage Bankers Association, the Urban Land Institute, rating agencies, and the Commercial Real Estate Finance Council (CREFC).
• Employees receive training hour credit for attending weekly staff meetings and investment committee meetings when an asset resolution is discussed in depth.
• New employee training includes cybersecurity, and all new employees must review the employee handbook.
• 3650 Loan Servicing has limits on the amount of training that employees can receive in any one of its identified training categories (i.e., on-the-job training, formal classroom training courses, and self-study).

Systems and technology

We believe 3650 Loan Servicing has an effective system and technology environment and adequate DR and cybersecurity programs. As a small relatively new company, it has just one fulltime IT employee, the vice president of technology, and heavily relies upon vendors for its different technology initiatives, including its primary asset management and special servicing system.

Servicing system applications 

3650 Loan Servicing's key systems include:

• RealINSIGHT®, a third-party cloud-based commercial real estate asset management and special servicing system that facilitates portfolio surveillance and provides workflow steps to help users manage assets in special servicing through resolution. 3650 Loan Servicing's RealINSIGHT® environment receives a data feed from Intex on the deals where it is the special servicer and the system is compatible with CREFC investor reporting.
• SharePoint, which is used for document storage and management.
• Several third-party commercial real estate information and analytics providers, including Trepp, Real Capital Analytics, and CoStar.

Since our last review, 3650 Loan Servicing worked with the vendor to make several enhancements to its RealINSIGHT® environment, including improving the borrower consents form, which now auto-populates and allows approvals within the system. 3650 Loan Servicing also worked with the vendor to improve loan business plans within the system, rent-roll surveillance, loan risk ratings, covenant tracking, insurance and real estate tracking, and asset status comment functionality. Additionally, 3650 REIT implemented a new company website and SalesForce's Pardot for direct e-marketing and began using RealINSIGHT®'s loan origination module.

3650 Loan Servicing plans to continue to work with RealINSIGHT® for further system customization and system integration into the servicing team's asset management and daily surveillance processes.

Business continuity and disaster recovery 

3650 REIT maintains a BC and DR plan that provides specific guidelines that the company follows in the event of a failure of any critical business capabilities. The vice president of technology last conducted a DR test in November 2021. The test evaluated system backups and data recovery services and was deemed successful.

3650 REIT implemented its BC and DR plan in March 2020 in response to the COVID-19 pandemic. All employees had laptops and were able to successfully work from home without major interruption. While working from home, 3650 Loan Servicing used Microsoft Teams and other real-time technology to facilitate communication and implemented daily team meetings to facilitate the management of their special servicing requirements.

A third party with robust capabilities maintains cloud-based servers for 3650 Loan Servicing, and 3650 REIT has an agreement with this vendor to perform system backups in an encrypted format several times during the day. A different third party provides redundant daily backups. Other aspects of BC and DR at 3650 Loan Servicing include that:

• Grass River Property LLC owns significant real estate in the Miami area, and its founders own a Miami-area airport hotel where 3650 Loan Servicing employees can work if a disaster prevents them from accessing the office.
• 3650 Loan Servicing plans to review RealINSIGHT®'s DR policy and latest test on an annual basis. 3650 Loan Servicing indicated that there were no material issues identified in RealINSIGHT®'s last DR test, which was conducted in April 2019. Management indicated that RealINSIGHT® has not done a formal DR test since April 2019 but that RealINSIGHT® enacted its DR plan and has been regularly monitoring and testing all redundancy and failover systems while it has been forced to have employees work remotely due to the COVID-19 pandemic.

Cybersecurity 

3650 REIT has a cybersecurity program designed to protect confidential data and prevent cybersecurity attacks. Key aspects of the program include that:

• 3650 REIT maintains network firewalls and intrusion detection and network monitoring software. It has implemented Microsoft Enterprise Mobile Security across all of its office locations.
• Dual factor authentication is needed to access company laptops and systems, and passwords need to be updated every 18 months.
• 3650 REIT carries cybersecurity insurance in an amount recommended by a third-party consultant.
• A third party performed a network penetration test in March 2020 for the first time. The company's penetration testing schedule of every 18 month is lengthier than many of our ranked servicers, which have such testing performed annually. The last test was completed in August of 2021 and noted no material issues.
• 3650 Loan Servicing indicated that phishing simulation emails are sent to its employees annually to increase awareness of these types of attacks. Though we have observed that most servicers send phishing simulation emails more frequently, the vice president of technology provides additional training by sending monthly emails to discuss new phishing attacks on employees and provides guidance on how to avoid them.
• The vice president of technology provides cybersecurity training to 3650 Loan Servicing employees on an individual basis.
• Operating system and software are set up to auto patch on weekly or monthly basis depending on the patch.

Internal controls

3650 Loan Servicing has established the framework for a solid internal control environment for a servicer of its size. The framework includes thorough policies and procedures (P&Ps), compliance and quality assurance testing (including built-in control features in RealINSIGHT®), and internal audits.

Policies and procedures 

3650 Loan Servicing's special servicing P&Ps are thorough and well-thought-out, in our opinion, reflecting the special servicing knowledge and experience of its senior managers. The P&Ps were recently updated to reflect what the team has learned after they completed loan resolutions, performed more extensive asset management, and utilized RealINSIGHT® more extensively.

Compliance and quality control 

3650 REIT's general counsel and chief compliance officer is responsible for overseeing company compliance. The general counsel and chief compliance officer's responsibilities include overseeing quarterly reviews of affiliate fees as well as an annual review of portfolio valuations. The head of loan servicing is responsible for oversight over all servicing activities. Additionally, RealINSIGHT® has built-in controls, including dashboards, alerts, and workflow calendaring that provide another layer of quality control.

3650 Loan Servicing has a well-defined DOA that ensures that at least one senior manager reviews and approves all important special servicing decisions. When the investment committee makes special servicing decisions that require an affiliate directing certificate holder's (DCH's) approval, a managing director who does not have access to the special servicing group's non-public information represents the DCH. While we believe this is an appropriate governance practice, we note that some of the investment committee members are located in shared office space with special servicing.

Internal and external audits 

The general counsel and chief compliance officer oversees an annual internal audit of special servicing operations performed by a third party. In 2020, 3650 Loan Servicing contracted a third party to perform separate reviews of the special servicing and the borrower consent processes. The 2020 audits found mostly adequate control effectiveness with one weak control identified in the borrower request process that has been addressed through enhanced action plans and notifications in RealINSIGHT®. Two exceptions were also noted in the special servicing audit: One involved a minor CREFC reporting delay that did not lead to a late submission of the investor report to the trustee. The other exception noted an error with the action plan functionality in RealINSIGHT® that led to the system generating inaccurate due dates for special servicing deliverables. When 3650 Loan Servicing discovered this issue before the internal audit review, it developed a workflow tool in Excel to use as a work-around as it worked with RealINSIGHT® to create a longer-term fix. The internal audit noted that the Excel tool was effective to ensure the special servicing team was following the terms of PSAs. The same third party conducted an internal audit in 2021 that focused just on special servicing and found that all procedures assessed had strong control effectiveness, noting no exceptions.

3650 Loan Servicing used an independent accounting firm to perform the Regulation AB audit for calendar year 2020. The report, which encompassed four transactions, noted no issues.

Insurance and legal proceedings

3650 Loan Servicing has represented that its directors and officers, as well as its errors and omissions insurance coverage, are in line with the requirements of its portfolio size as of June 30, 2021. As of the date of this report, 3650 Loan Servicing reported that it is not currently facing any servicing-related litigation matters, and it is not subject to any defensive claims that, individually or in the aggregate, are expected to have a material impact on the company's financial status.

Loan Administration--Special Servicing

The loan administration subranking is AVERAGE.

3650 Loan Servicing is an appointed special servicer on a portfolio that, as of June 30, 2021, included four conduit transactions and two SASB transaction, which in the aggregate total $3.8 billion in UPB backed by 149 loans. It processed a relatively large volume of borrower requests in 2020 and the first half of 2021 for a servicer of its size, primarily owing to borrower relief requests stemming from the COVID-19 pandemic in 2020.

Management indicated that, as June 30, 2021, only 1.96% of its portfolio was delinquent and only 1.96% of its portfolio was in special servicing. Accordingly, the active special servicing portfolio contained only two loans aggregating $37 million in UPB with an average age of 7.6 months (see table 3). 3650 Loan Servicing completed its first loan resolution in 2020 by negotiating a loan assumption and modification on a defaulted CMBS loan within 4.4 months of loan transfer, which we believe represents an efficient outcome. The company has yet to handle any REO during its short operating history.

Table 3

Loan recovery and foreclosure management

3650 Loan Servicing maintains effective loan workout and foreclosure management protocols despite a limited track record. Highlights include that:

• The loan asset manager sends a default notice letter to the borrower within five days of a special servicing transfer and starts working with the borrower to execute a pre-negotiation agreement.
• An on-boarding special servicing checklist is used by the loan asset manager to perform a quality control review of the asset. This includes a review of the PSA and other loan documents; loan data in RealINSIGHT®; and orders applicable third-party reports, including environmental, inspection, and appraisals, as well as broker opinions of value.
• An initial due diligence review by the loan asset manager and support personnel includes a legal review in coordination with local external counsel, a property condition review, a market analysis, a property financial analysis, and a valuation of the property, which will drive the resolution strategy, based on net present value (NPV) analysis.
• The loan asset manager prepares the asset status report (ASR) within 60 days of transfer or as required in the PSA and completes an internal business plan that includes the recommended resolution strategy, alternative actions, guarantor description, property description, loan structure, property valuation, description of the legal process, property financial analysis, and alternative resolution strategy, among other information.
• Special servicing ASRs and business plans require approval per 3650 Loan Servicing's DOA.
• Once approved, the loan asset manager executes the resolution strategy discussing any open action items during weekly asset status meetings.
• Before receiving approval for foreclosure, the loan and REO asset manager are required to perform pre-foreclosure due diligence, which includes an updated inspection of the property, an examination of title, delinquent tax search, and ordering and reviewing environmental reports.

Table 4

REO management and dispositions

3650 Loan Servicing maintains P&Ps that call for proactive REO management and sales oversight. Notable aspects include that:

• The REO asset manager will develop a REO business plan within 30 days of taking title that includes a recommendation to either stabilize or immediately sell the property based on an NPV analysis.
• The business plan will include a description of the property, property cash flow reports, property status description, the leasing strategy, and sales strategy.
• The third-party property manager submits an annual budget within 60 days of title transfer. Any non-budgeted maintenance items or capital improvements exceeding $2,500 require approval from the REO asset manager.
• After selecting a broker, the REO asset manager monitors the listing and, upon receipt of bids that are aligned with the REO business plan, seeks approval to sell the asset according to the DOA.
• REO asset managers will ensure that all necessary parties are promptly notified after the asset is sold.

REO accounting and reporting

3650 Loan Servicing's controls and procedures for property-level accounting and oversight are adequate, though they have not been used since it has yet to handle an REO in its short operating history. Highlights include that:

• Property managers will send monthly financials, which will be reviewed by the REO asset manager.
• 3650 Loan Servicing indicated that it expects to do formal operational audits of the property management companies managing its REO assets.
• The REO asset manager will ensure that the disbursement account is closed 15 days after receipt of the final reporting package.

Subcontracting management

3650 Loan Servicing engages vendors for various special servicing tasks, including appraisal, legal, valuation, environmental, property management, brokerage, construction management, and forensic accounting. Subcontracting management at 3650 Loan Servicing follows guidelines:

• 3650 Loan Servicing maintains a list of preferred vendors.
• The loan or asset manager is responsible for identifying and vetting potential vendors; however, the head of loan servicing must give final authorization and execute the engagement of the vendor.
• Loan and REO asset managers monitor the vendor's performance throughout the engagement and informally report any issues to the head of loan servicing.
• If a new vendor relationship is required, the loan or REO asset manager utilizes a vendor maintenance form to request approval and works with the accounting department to establish the vendor in the necessary systems for internal tracking.

Performing loan surveillance

Following the closing of a transaction where 3650 Loan Servicing is the named special servicer, loan asset manager support personnel board the transaction in RealINSIGHT® at the pool and loan level. An asset manager then reviews the information within 60 days of closing. Additionally, 3650 Loan Servicing boards loans from its bridge and event-driven portfolio using customized features for each loan.

Subsequently, performing loan surveillance is performed, which includes:

• An analysis of the financial statements and property inspections, market performance, and the sponsor.
• Weekly calls with master servicers to discuss loans of concern.
• The servicing team maintaining an internal watchlist and risk ratings for all loans in which it is the named special servicer, both of which are reviewed and analyzed during monthly meetings led by the head of loan servicing. Asset manager support personnel are in charge of collecting and manually entering any information necessary to maintain the internal watchlist that does not feed into RealINSIGHT® automatically.
• That since our last review, 3650 Loan Servicing developed a tenant property impact analysis that show the amount of exposure that high-risk rated loans have to high-risk tenants.
• That in response to the COVID-19 pandemic, 3650 Loan Servicing proactively reached out to is borrowers to help them address any issues before effecting a transfer to special servicing. Management believe these efforts prevented unnecessary transfers to special servicing.

Borrower requests

In CMBS transactions where a 3650 REIT affiliate has acquired the B-piece, it has negotiated the right for the special servicer to take an active role in the review and decision making of material servicing decisions, including performing loan consents. It considers this to be a key component of its strategy to handle borrower-facing activities during the life of the loan. The borrower consent request action plan prompts in RealINSIGHT® are used to facilitate the review process. The asset manager prepares a review memo, which includes the request, loan background and history, asset manager analysis, and recommendation. The request must be approved per the DOA, which includes a review by the COO and head of loan servicing and, additionally in some cases, an investment committee member. 3650 Loan Servicing can review and approve borrower consents in the system.

In 2020, after becoming the named special servicer on CMBS transactions for the first time, 3650 Loan Servicing processed 15 leasing consents, 17 forbearances, one assumption, and 15 requests that fell into the "other" category. 3650 Loan Servicing indicated that it averaged 10 business days to process all borrower consents in 2020, a good turnaround time for such requests, though we note that there was only one assumption request, which typically take more time to process. In the first half of 2021, 3650 Loan Servicing processed five leasing consents, one management change and repair extension, and 15 requests that fell into the "other" category. The average time to process consents in the first half of 2021 was approximately eight business days.

In addition, management reported that it received 38 COVID-19-related borrower relief requests during 2020 that did not require a special servicing transfer but did require special servicer consent. Of those 38 requests, 25 were withdrawn by the borrower, 12 were denied, and one was approved.

Legal department

Two in-house attorneys are available to support special servicing. Notable aspects of the legal function include that:

• After the loan is transferred to special servicing, asset managers work with in-house legal staff, who oversee the engagement process of outside legal counsel.
• In-house legal staff control the approved list of outside counsel.
• Asset managers review legal bills before a payment is authorized.

Financial Position

The financial position is SUFFICIENT.

Related Research

• 3650 REIT Loan Servicing LLC AVERAGE Commercial Mortgage Loan Special Servicer Ranking Affirmed; Ranking Outlook Stable, Nov. 23, 2021
• Select Servicer List, Oct. 13, 2021
• Servicer Evaluation Spotlight Report™: Environmental, Social, And Governance Factors Have Consistently Powered Our Servicer Evaluation Rankings, Nov. 16, 2020
• Servicer Evaluation Spotlight Report™: U.S. Commercial Mortgage Servicers Preparing For Impact From COVID-19, April 3, 2020
• Servicer Evaluation: 3650 REIT Loan Servicing LLC, March 11, 2020
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019