Rationale

S&P Global Ratings' overall ranking on LNR Partners LLC (LNR) is STRONG as a commercial mortgage loan special servicer. On Dec. 17, 2021, we affirmed this ranking (please see "LNR Partners LLC STRONG Commercial Mortgage Loan Special Servicer Ranking Affirmed; Ranking Outlook Stable"). The ranking outlook is stable.

Our ranking reflects LNR's:

• Experienced and tenured senior managers and asset management staff, accompanied by a well-defined organizational structure;
• Well-automated technology systems that include a proprietary asset management system that supports its platform, allowing for efficient leveraging of its operations;
• Effective internal controls, including well-detailed policies and procedures for special servicing operations and a high degree of workflow and process automation for asset management activities;
• Highly effective analyst training program;
• Robust surveillance practices; and
• Demonstrated track record and ability to successfully resolve a high volume of defaulted CMBS loans and manage real estate-owned (REO) assets of all levels of complexity.

Since our prior review (see "Servicer Evaluation: LNR Partners LLC," June 29, 2020), the following changes and/or developments have occurred:

• LNR's named special servicing portfolio decreased to 155 CMBS/Freddie Mac K-series securitized transactions from 185, and the underlying collateral decreased to 5,444 loans with an unpaid principal balance (UPB) of $78.9 billion as of June 30, 2021, compared with 6,425 loans with a UPB of $93.8 billion as of Dec. 31, 2019.
• Weakened economic conditions resulting from the COVID-19 pandemic spurred significant loan-transfer volume, resulting in an increase of the active specially serviced loan portfolio to $5.9 billion and 225 loans as of June 30, 2021, from $1.7 billion and 104 loans as of Dec. 31, 2019.
• Although the UPB of active REO inventory has remained largely unchanged at $3.3 billion the number of collateral properties declined to 158 from 270.
• Since the beginning of 2020, LNR resolved 190 loans aggregating $5.2 billion in UPB, including $3.4 billion of UPB from 92 loans that were returned to the master servicer.
• Since the beginning of 2020, LNR reported that among the nearly 1,500 borrower consents it processed, which represented $50.7 billion in UPB, were 284 loans totaling $6.4 billion in aggregate UPB where forbearance was requested.
• A team lead of nonperforming loans departed the firm, and his responsibilities were assumed by a highly seasoned director who also continues to oversee borrower services.
• LNR completed a number of information technology (IT) upgrades, and its document approval system, which was implemented in 2020, substantially aided its ability to review and approve transactions in a remote working environment.
• LNR continued transitioning its third-party loan servicing system, Financial Industry Computer Systems Inc. (FICS), to its proprietary asset management system, LNR Partners Asset Management System (LPAMS).
• In September 2020, all Starwood Property Trust Inc. (SPT) offices--including LNR's Miami headquarters--implemented a return-to-office policy for most employees.

The ranking outlook is stable. We believe LNR has been effective in navigating the challenges presented by the COVID-19 pandemic and has utilized its experienced real estate professionals and workout personnel to handle the increased volume in special servicing, which appears to have peaked at the end of 2020. We further expect LNR's leadership team will continue to invest in the business and maintain the necessary staff and systems consistent with the ranking.

In addition to conducting a virtual site visit 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

LNR, headquartered in Miami Beach, Fla., is a market leader in both CMBS and commercial real estate special servicing and debt investing. The firm is a subsidiary of Starwood Property Trust Inc. (SPT), which, according to management, is the largest commercial mortgage REIT in the U.S. SPT operates in four business segments: real estate lending, real estate investing and servicing (LNR), property, and infrastructure lending.

As noted above, LNR operates as a part of SPT's Real Estate Investing and Servicing (REIS) business segment, and the company and its predecessors have been investing in and managing commercial real estate debt for 30 years. LNR's investment management division operates its business separately and apart from the special servicing division, and it has policies to manage the inherent conflicts of interest. This division is involved in purchasing and/or selling CMBS bonds, including B-piece investments (it also teams up with other B-piece investors), which lead to special servicing appointments.

As of June 30, 2021, LNR was appointed on $78.9 billion of CMBS/Freddie Mac K-series special servicing transactions (based on UPB) and managed the largest portfolio of active specially serviced loans (see table 1). As of June 30, 2021, the underlying collateral associated with these transactions was spread across 155 transactions with 5,444 loans. In addition, LNR is the special servicer for three commercial real estate/collateralized debt and/ or loan obligation (CRE/CDO/CLO) transactions with a UPB of $2.6 billion.

Besides obtaining servicing assignments from its investment management division, LNR has been actively seeking third-party special servicing contracts and attempting to secure strategic partners to build its portfolio and special servicing book.

Table 1

Management And Organization

The management and organization subranking is STRONG.

Organizational structure, staff, and turnover

LNR has an experienced management team and staff. Its average industry experience and company tenure levels are lengthy and largely similar to other special servicers that we rank as STRONG (see table 2).

Table 2

As of June 30, 2021, LNR reported 176 employees in its special servicing group. The president of REIS, who recently added the title of president of Starwood Mortgage Capital (an SPT affiliate), reports to SPT's president, who in turn reports to SPT's CEO. The managing director, head of special servicing (MD-SS), who has 28 years of experience, reports to REIS' president. The MD-SS has four director-level direct reports who respectively oversee loan asset management (LAM); real estate asset management (REAM); commercial loan servicing, investor reporting and analytics; and surveillance.

Specifically:

• LAM is headed by a director with nearly 30 years of experience. The 30-person asset management team handles workouts associated with nonperforming loans as well as some of the more complex consent requirements associated with performing loans. The director oversees three nonperforming loan team leaders; the duties of two are segmented into geographic regions, and one focuses on hotel properties due to the unique nature and specific challenges associated with this asset class. A director, who reports to the LAM director, oversees the Borrower Services Group (BSG), a nine-person unit that is responsible for the review and approval of all leasing and property management requests as well as the review and approval of the majority of assumption/transfer of ownership requests. The LAM director also oversees the nine-person team responsible for the LAM duties of SPT's CLO portfolios. In addition, a senior manager who oversees six staff members that handle special servicing administrative matters reports to the LAM director. This unit is also supported by a foreclosure department, which--under the in-house counsel's supervision--tracks down documents and assignments to ensure the special servicer is in a position to commence foreclosure.
• REAM, a 16-person unit, is headed by a director with 39 years of experience (25 years with LNR). This group handles REO asset management and disposition functions. The director has four direct reports, including two highly seasoned regional team leaders (East and West Coast), a senior manager of operations, and a real estate transition manager who oversees the loan-to-REO process.
• The commercial loan servicing, investor reporting, and analytics group is headed by a director with 28 years of experience, including 19 years with LNR. This 23-person unit handles investor reporting, shadows primary servicers' loan administration work, and provides administrative support on loans for which LNR is the named special servicer.
• The surveillance group is managed by a director who has over 20 years of industry experience. This 12-member group, which includes four rotational analysts, monitors LNR's CMBS portfolio performance, interacts with primary servicers, and handles investor and rating agency relations.
• SPT departments that support the LNR platform include finance, human resources, legal, IT, and internal audit and compliance.

We also note the following:

• LNR's overall turnover rate totaled 9% during the first half of 2021 and 19% for full-year 2020. Some of the turnover was attributable to internal transfers seconded to the group to handle the elevated volume during 2020, which temporarily boosted reported staffing to a peak of 200 as of June 30, 2020. However, most of these staff have since returned to their original departments, and the overall headcount of 176 is similar to the 174 reported at the time of our last review.
• In 2020, LNR's reported staffing metrics for experience and tenure remained largely consistent with our last review, with a modest decrease in average asset manager experience to 14 years from 16 years.
• As of June 30, 2021, LNR's loan asset managers handled approximately eight loans (compared with seven at to our last review) on average, and REO asset managers were responsible for an average of approximately 13 REO properties.

Management indicated they have felt comfortable with present staffing levels as well as levels in the heights of the COVID-19 pandemic. Management further noted that it had the support of 10 summer interns as of June 30, 2021; these internships have been historically utilized as feeders into the analyst rotational program.

Training

In our view, LNR has a highly effective internal training program, especially for integrating and educating new junior associates. Junior associate orientations and an education program have been in place for some time, have helped many staff members become successful in their positions, and have led to several promotions.

Specifically:

• Since its 2004 establishment, LNR has utilized a 30-month formal analyst rotational program across eight departments, allowing for cross-training and reallocation of staff when needed in its special servicing operations, and offering a clear career path for entry level hires. Internal promotions of analysts are encouraged, and 61 of the 181 analysts who have participated in the program remain with the company, including 12 program graduates that currently work in special servicing.
• Department managers are responsible for determining specific training needs within their group.
• The legal department coordinates with external law firms to provide additional industry training on legal matters.
• Ongoing training includes internal and external class sessions covering industry and job-specific subjects, conferences, and mentoring from senior staff.
• Training hours are tracked by the director of surveillance in a manual process; LNR targets 40 hours per person annually, of which it fell short in 2020, averaging 20 hours per employee. During the first half of 2021, LNR reported actual average training hours per employee of 16.

Systems and technology

LNR has an effective technology environment and well-integrated applications to support special servicing and asset management. SPT maintains overall information technology administration, and its 29-person department supports all of LNR's automation needs while also supporting the disaster recovery (DR) efforts for its critical business systems. It also works with LNR through direct assignment of personnel, steering/development committees, and in-house liaisons in LNR's special servicing departments for continued improvements and enhancements. Key elements of its systems and applications, business continuity (BC) and DR programs, and security environment are discussed below.

Servicing system applications 

• LPAMS, a proprietary asset management application, is the central tool for asset surveillance and special servicer data management and reporting for loans and REO assets. The application currently has the flexibility to produce 287 customized loan-, property-, deal-, and portfolio-level reports.
• The LPAMS database is updated frequently and supports the extensive reporting and analysis that is fundamental to REIS's CMBS management requirements.
• LPAMS is interfaced with FICS v7.8 for shadow servicing of loans that are primary serviced by others, primary servicing of whole loans, overall monitoring of borrower consents, and data downloads from Trepp LLC for CMBS transactions to aid in workout plans.
• LNR continues to transition the servicing functions of FICS to LPAMS, with both systems actively running while the transition takes place. LPAMS is scheduled to replace all FICS functions by early 2022.
• Used as an underwriting tool, Nexus Dashboard is a proprietary user interface that aggregates internal data from LNR's workout history, watch list, and surveillance comments as well as all loans originated by its Starwood affiliates, along with various external sources. It provides searching capability across all the sources of data, along with the ability to visually display it on a map for detailed analysis.
• ProLaw, a purchased software application, interfaces with LPAMS to support legal management requirements and track outside counsel assignments.
• PeopleSoft, a purchased real estate accounting application, works with the asset management system to address REO accounting and track monthly property financial performance; it is interfaced to LPAMS.
• LPAMS uploads to a data warehouse, DataMart, for data query and reporting needs. DataMart, which contains data on more than 105,000 commercial real estate loans, pulls information from numerous third-party sources to generate reports and aid in analysis.
• Oracle EPM report designer is currently used but is being replaced by Microsoft Power BI in phases. The Power BI Software provides flexibility in pulling data from different sources, dynamic analytics, and visualization tools that work on PCs and mobile devices.
• LNR uses document imaging across the organization to facilitate online access to CMBS pooling and servicing agreements (PSAs) and loan-level documents.
• LNR utilizes Worksmart (Appian), which interfaces with LPAMS as an electronic document approval system. Since our last review, Appian had several enhancements, including thousands of workflow processes to increase the efficiency of documentation processing.
• Appian portals have been implemented to communicate with borrowers (Borrower Portal) and a CCR Portal has been implemented for LNR to share information with its controlling class representatives as well as gain their approvals for specific actions as required.

Business continuity and disaster recovery 

• SPT's IT department is responsible for directing, coordinating, and supporting the DR efforts for its critical business systems. Data centers managed by third parties are in Miami and Alpharetta, Ga., and offer security and disaster preparedness.
• Servers are fully backed up weekly with incremental backups daily until the next full backup. All critical servers are replicated to the DR site in near real-time.
• The DR plan is extensive and detailed and includes a recovery time objective of 12 hours for specific applications to be recovered from its primary data center. The plan is stored and maintained on the corporate intranet, with hard copies maintained at all IT-staffed sites. Its DR plan is tested and reviewed annually by SPT's chief information officer. LNR concluded its most recent DR testing on July 1, 2021, and experienced no loss of functionality or data.
• Its DR and BC plans including response procedures to address an operational disruption as a result of a pandemic event. Critical associates are issued company laptops to continue operations should the headquarters in Miami Beach become inaccessible. LNR also has a remote desktop Citrix platform that would allow all employees to access to all company IT resources--as well as desktop and business applications--to resume work from their homes, a workplace recovery site, or another company office.
• In addition, an employee backup location that provides recovery services for 32 employees for a 30-day period are located in preferred co-working office space Florida locations in Miami Beach, West Palm Beach, and Maitland as well as in Fayetteville, Ga. Once the 30-day agreement has concluded, an alternate arrangement to extend the use of the facility is possible in the event of a long-term interruption.
• LNR indicated that all SPT offices are back to an in-office model, with only a few exceptions, as of September 2021.

Cybersecurity 

• SPT/LNR has an extensive information security program and controls for protecting private information and preventing cyber-attacks that include security procedures for personal information and vendor information security management.
• Internal phishing campaigns are conducted semi-annually, and penetration testing is performed by a third party on an annual basis. The last test, performed on Jan. 11, 2021, cited no material problems. In addition, monthly scans of perimeter systems and internal hosts are conducted and addressed.
• Access to sensitive data and information via SPT's computer information systems is limited to associates who have a legitimate business reason to access such information. SPT has policies and procedures in place to complement the technical safeguards to provide security to its information systems and data.
• Single sign-on and multi-factor authentication are utilized to provide identity governance.
• In addition, LNR maintains cybersecurity insurance that covers consumer credit monitoring services, remediation services/cost of a cybersecurity event, and specified vendor cybersecurity risk.

Internal controls

LNR has a solid control environment designed to mitigate operational risk. The control environment includes detailed policies and procedures and an annual internal audit of loan servicing, as well as an annual external audit of management's attestation of compliance with Regulation AB (Reg AB). Other notable aspects of internal controls are discussed in the policies and procedures (P&Ps), compliance and quality control, and internal and external audit sections below:

Policies and procedures 

• LNR's P&Ps manuals cover each department and their related functions, including procedures for required approvals depending on the nature of the asset and contemplated resolution strategies.
• LNR reviews, documents, and approves changes to its operational P&Ps as servicing staff identifies new specific issues that affect servicing activities and as new processes are developed to address any such issues.
• Notwithstanding the above, an October 2020 internal audit report of the real estate asset management (REAM) department noted that the 2019 REAM P&Ps lacked documented procedures for a number of areas and the P&Ps do not always reflect current practices, resulting in an "unsatisfactory" operational audit result. Management subsequently updated the P&Ps in January 2021 to reflect current practices and updated its approvals matrix in early 2021.
• Each department manager is responsible for coordinating the process of updating P&Ps for their respective areas on an as-needed basis but no less than annually. Once reviewed and deemed final by the department manager, the P&Ps are forwarded to the legal department for review.
• Following the legal department's review, updated P&Ps are circulated to the employees to acknowledge receipt and confirm compliance.
• P&Ps are available electronically on the company's internal network.
• Pursuant to its P&Ps, LNR maintains an informational and technological wall between the special servicer and the investment division that prevents material non-public information in the possession of the special servicer from coming into the possession of the investment division.
• In the office environment, there is also physical separation between personnel involved in investment operations and personnel involved in the special servicer activities. The firewall in place between the investment management group (public) and the surveillance/servicing group (private) allows both groups to enter information into LPAMS without exchanging material non-public information.

Compliance and quality control 

• The legal department abstracts all new deal PSAs into the asset management system to facilitate compliance. Each proposed asset resolution then triggers a pre-closing compliance department review of a compliance summary report and checklist prepared by asset managers through the asset management system.
• The compliance group also conducts post-closing audits of loan resolutions.
• Internal audit staff--in conjunction with the legal department and external auditors--has developed a standard review and audit testing program that is based on the Reg AB servicing criteria. These activities are part of a continuous review of LNR's servicing platform as it relates to Reg AB. The vendor, which works under the compliance manager's supervision, completes test steps on a monthly, quarterly, and annual bases, depending on volume and risk.
• LNR recognizes that its corporate structure and business interests make it impossible to avoid all relationships that could involve conflicts of interest. Accordingly, potential conflicts of interest are approved by, or at the direction of, the board of directors or the governance committee and monitored by the compliance department and general counsel. Further, SPT maintains a code of conduct handbook that includes provisions to avoid conflicts of interest; employees are required to acknowledge receipt of the handbook at the start of employment and annually thereafter.

Internal and external audits 

• Audits are conducted by the internal audit department, the chief audit executive of which reports independently to an audit committee of SPT's board of directors.
• The internal audit department develops an annual audit plan, based on an annual risk assessment, which the audit committee reviews and approves. The internal audit department's focus is to identify any control weakness in a process, non-adherence to stated policies, or a policy that is absent regarding a practice.
• LNR performs an annual, platform-wide Reg AB attestation, which is examined by a third party. There were no exceptions in the 2020 Reg AB certification.
• As previously noted, material issues were noted in the 2020 internal audit of REAM, which received an "unsatisfactory" rating in the area of operations. The audit scope covered a variety of servicing processes, including policies and procedures, REO bank accounts, REO reports, business plans, leases, licenses and permits, REMIC compliance, appraisals, and real estate taxes.
• SPT's internal auditors, in conjunction with an external accounting firm, performed a review of asset services loan servicing with a sample of specially serviced loans. The January 2021 audit received an overall "satisfactory" rating. The audit scope covered a variety of servicing processes, including loan boarding, property inspections, document storage, invoice processing, loan management and payoffs, cash management, insurance, licensure, and investor reporting. The minor issues noted have been addressed by management via a process change to provide enhanced oversight.

Insurance and legal proceedings

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

Loan Administration – Special Servicing

The loan administration subranking is STRONG.

LNR's active special servicing portfolio had a UPB of approximately $9.1 billion as of June 30, 2021, an increase of 81.6% from $5.0 billion as of Dec. 31, 2019 (our last review; see table 3). Sizable volume increases in LNR's active portfolio during this period resulting from pandemic-influenced borrower relief requests are consistent with trends reported by other major special servicers we rank.

LNR has an extensive track record managing and disposing troubled assets nationwide while handling complex assets collateralized by multiple property types. LNR has resolved 735 assets with a UPB of $14.2 billion since 2017 (see table 4), and management further reported that it has resolved more than 6,800 nonperforming assets with a UPB of more than $80 billion since its inception.

LNR manages the majority of its special servicing operations from its headquarters in Miami Beach. As of June 30, 2021, LNR employed 176 personnel within its servicing platform, including 28 dedicated loan asset managers and 12 REO asset managers.

Table 3

Regarding the current portfolio's composition, the percentage of LNR's UPB consisting of REO assets decreased to 35.8% as of June 30, 2021, from 66.4% of active special servicing inventory as of Dec. 31, 2019 (our last review). As a percentage of UPB, property portfolio collateral was heavily weighted toward retail (46.2%) and lodging (22.4%), though all major property types--including office (13.7%), mixed use (8.5%), multifamily (3.1%), and industrial (0.5%)--were represented. The active portfolio remains geographically diverse, as properties are located in at least 46 states throughout the U.S. The largest UPB concentrations are in more populous areas, including New York (17.4%), California (9.4%), Texas (6.7%), Illinois (5.4%), Pennsylvania (4.7%), and Florida (3.8%).

Table 4

Loan recovery and foreclosure management

The LAM department is divided into three teams. Two of the teams are divided into two geographic regions, the East/West Coasts and Central. In addition, LNR LAM has a separate hospitality team that specializes in hotels due to the specific challenges and unique nature of this property type.

LNR has well-described, effectively controlled loan file transfer, initial asset review, and system boarding procedures. LNR has effective controls for analyzing and documenting recovery actions; it also maintains effective controls for monitoring its progress through required and detailed asset business plans, asset status review meetings, and credit resolution cases. Recovery practices are based on maximizing net present value (NPV) under varying alternative recovery scenarios.

Specifically:

• Loan recovery practices include the requirement of executed borrower pre-negotiation letters and generally follow a tri-track of foreclosure/note sale evaluation in parallel to workout discussions to maintain maximum borrower pressure.
• LNR has proactive measures to capture available property cashflows through the pursuit of receiverships and activating lockbox triggers.
• Within 60 days after a loan has become specially serviced, the asset is discussed at a monthly special servicing inventory meeting, where a standardized system-integrated business plan is presented with recommendations approved through authority delegations. Business plans, which are updated as workout discussion changes, are generated with key loan metrics that are automated from LPAMS. The control process is the same for approving foreclosures and pursuing deficiencies.
• LNR generally obtains two or three brokers' opinions of value (usually within 60 days after transfer and refreshed no less than annually), and it orders a new appraisal pursuant to PSA requirements. These valuations are reconciled and used as the foundation of determining the workout strategy.
• LNR uses both in-house and external counsel with bankruptcy expertise to assist loan asset managers through the bankruptcy process when required.
• Analysis procedures include REMIC considerations, advancing/nonrecoverability discussions with master servicers, and a summary checklist generated through LPAMS that the compliance group reviews and approves.
• A foreclosure management unit coordinates title, single-purpose entity creation and assignment work, and oversees the progress of all active foreclosures in coordination with the asset manager.
• The company takes a proactive approach to workouts and strives to minimize the likelihood of re-defaults by requiring borrowers to invest fresh new equity as a condition of a modification and to evidence a renewed commitment to the property. It further seeks to include additional lender-friendly terms in modification agreements should a re-default occur or a capital event occur that would otherwise solely benefit the borrower.

REO management and dispositions

REAM handles all REO assets, organized into two geographic regional teams: East and West. It further subdivides the country into 12 smaller territories to obtain operating efficiencies with brokers and property managers in the respective regions. Each team leader manages several REO managers and associates responsible for asset management and property oversight.

REO management and liquidation processes are well-designed. Once the asset status changes to REO, there is a disciplined monitoring program of the REO business plan and subsequent sale. We view the REAM organizational structure favorably because it enhances asset managers' market and property knowledge, which should lead to better execution. Other notable features associated with REAM practices include:

• An REO asset manager is assigned at an early stage in the foreclosure process to assist the transition team with due diligence and vendor selection (property managers, brokers, and appraisers).
• The transition manager coordinates the loan-to-REO process with the asset manager, including various due diligence tasks, such as legal documentation and REO/property manager bank accounts.
• LNR chooses property managers from an approved vendor list, which is continuously updated and refined; all are third-party companies with no LNR affiliation.
• The REO asset manager is responsible for developing, within delegation of authority and committee approvals, the property budget and marketing plan. The asset manager also monitors third-party property management companies, negotiates leases and sales offers, and analyzes budget variances to plan.
• A decision is made at the front-end of the process, based upon NPV considerations, as to whether an REO asset is to be held for a value-add leasing opportunity or should be considered for near-term sale. Initial value-add/hold decisions are revisited periodically and formally evaluated no less than annually to determine if the asset is adhering to the original strategic plan.
• REO operating budget plans are completed within 60 days of title and exit strategy plans are completed within 90 days of title. LNR incorporates input from the property management company in the budgets.
• Property managers and brokers submit monthly reporting packages that the REO asset manager and accounting areas review.
• LNR reviews proposed sales at periodic asset management meetings.
• A transition manager, who is dedicated to the closing of the sale of REO properties, completes closing pro-rations, which are ultimately reviewed and approved by the REAM director.

LNR has handled sales transactions throughout the U.S. for all main income-property types and specialized assets, such as golf courses. Since 2017, LNR has sold approximately 480 REO assets for gross proceeds of more than $4 billion (see table 5). It further reported that since inception, it has managed and sold more than 3,000 CMBS REO properties for aggregate proceeds of $27 billion as a special servicer.

LNR's average hold time for REO sales of 31.7 months during the first half of 2021 was slightly higher than the 27.6 months reported as of our last review. In addition, average gross sales proceeds have approximated market value during the past several years. We have observed that LNR reports longer hold times than its similarly ranked CMBS special servicing peers, which we generally view unfavorably. However, LNR has proven to be effective at leasing and stabilizing REO properties. It reported that the REO team signed more than 4,800 leases, with total term rent of more than $3.0 billion since 2012-2020, demonstrating its ability to create value.

Table 5

REO accounting and reporting

LNR has well-delineated procedures for REO accounting and reporting property incomes and expenses. Written procedures, sample notices, and stated practices indicate an effective tracking of advances against collateral values and dialogue with master servicers on non-recoverability concerns. In addition:

• Property managers are required to send monthly electronic reports and financials to LNR. These reports are uploaded to PeopleSoft, which is interfaced with LPAMS and DataMart for budget tracking, trend analysis, and consolidated reporting.
• The accounting department, which works under the funds controller in the finance department, reconciles property managers' reports and bank account activity to the REO system and uploads that information to the DataMart.
• The accounting and REO departments conduct independent financial reviews on selected properties and property management companies.
• LNR maintains a monthly process to review advances relative to estimated collateral values and maintains an advance watch report designed for master servicers to have updated information to make informed advancing decisions in considering non-recoverability.

Subcontracting management

LNR has well-controlled and sound procedures governing subcontracting oversight. LNR maintains approved vendor lists by service category and monitors vendors for compliance with licensing, certifications, and other regulatory requirements as needed and maintains information about competitive market pricing. Additional highlights include:

• Vendors must be prequalified for inclusion on the approved lists.
• Asset managers submit work-order requests through the asset management system.
• The asset manager and team leader review the selected vendors before engagement. Selection is generally based on property type, location, and the vendor's experience and performance.
• LNR uses standard engagement letters for all service providers, and the servicer tracks active assignments on the asset management system.
• An outside consultant handles the bidding and engagement of appraisers. Management then chooses one of the appraisal bids, and the outside consultant reviews the final appraisal reports along with the asset managers.
• Environmental and engineering reports are managed by the REO department. Loan asset managers engage the REO department to bid out individual projects using the approved vendor list.
• Management reviews of service providers produce various tracking reports. Brokerage and property management engagements have standard 30-day termination clauses, which can be exercised if LNR's standards are not met. Further, vendors deemed ineffective are removed from the approved vendors list.

Performing loan surveillance

LNR employs comprehensive and robust surveillance practices to monitor the deals for which it is named as special servicer. In addition to monitoring CMBS portfolio performance, the surveillance group interacts with master servicers, and handles investor and rating agency relations. Notable aspects of surveillance include:

• Surveillance begins at underwriting, with an analyst assigned to a deal and sitting in on all deal-related discussions, taking note of potential credit issues, and making sure those issues are included in the initial surveillance comment for the respective loan.
• When a new deal closes, surveillance goes through the loan documents and abstracts the loan triggers. Those triggers are then entered into a custom-built LPAMS module that will alert the deal analyst when a trigger is met.
• Each surveillance analyst is assigned approximately 10 deals a month (approximately 500 loans) to do an in-depth review of the deal performance. All deals are reviewed no less than quarterly. LNR has an internal watchlist separate from the CREFC watchlist that is maintained in LPAMS.
• Deal- and portfolio-level reports are generated and archived each month, available for senior management.
• Surveillance undertakes an annual project to review all loan inspections across its named portfolio for potential credit or condition issues that might otherwise be missed by the master servicers.
• The surveillance department reviews performing loan consent matters (discussed below) handled in-house to determine whether new credit issues have arisen or if known issues have been mitigated, and it adjusts projected losses based on information from the LAM group.

Borrower requests

LNR has an effective and controlled approach for analyzing borrower consent matters. Management believes performing loan requests provide an opportunity to confirm that borrowers and master servicers are abiding by the loan documents. The BSG is largely responsible for these reviews. Highlights include:

• Unlike most special servicers, LNR generally includes the right to review performing loan consents, typically a master servicer function, into the PSA.
• If a potential future issue is discovered during the review process, BSG communicates with the surveillance team so the loan can be added to the internal watch list.
• BSG is responsible for the review and approval of all lease, subordination and non-disturbance agreement, and property management change requests on performing loans.
• BSG also handles the review, approval, and processing of a large percentage of assumption/transfer of interest requests.
• BSG shares performing consent responsibilities with the LAM group, which handles the more complex assumption transactions, as well as collateral and escrow modifications, property releases, etc.
• During the first half of 2021, LNR reported that it processed 475 consent requests on loans with an aggregate UPB of $15 billion, including 246 that were related to leasing consent reviews, 64 pertaining to forbearance, 36 assumptions, with the balance primarily a combination of property management changes, collateral releases and miscellaneous requests.
• In 2020, LNR reported that it processed 1,001 consent requests on loans with an aggregate UPB of $35.7 billion, including 530 that were related to leasing consent reviews, 220 pertaining to forbearance, 59 property management changes, 57 assumptions and 44 collateral releases, with the balance primarily miscellaneous requests.

Legal department

LNR has a six-person legal department to advise asset managers, engage counsel from its approved attorney list, and track litigation progress.

Specifically:

• Responsibilities include reviewing deal documents, negotiating servicing agreements, reviewing/approving legal fees, and maintaining the approved attorney list along with per-engagement performance monitoring of law firms.
• Legal also oversees certain compliance training and participates in asset management-related training events.
• The asset management system tracks the status of legal engagements and legal expenses, along with purchased software that facilitates case management and invoice reviews within the legal department. However, asset managers review legal bills before payment is authorized.

Financial Position

The financial position is SUFFICIENT.

Related Research

• LNR Partners LLC STRONG Commercial Mortgage Loan Special Servicer Ranking Affirmed; Ranking Outlook Stable, Dec. 17, 2021
• Select Servicer List, Oct. 13, 2021
• Starwood Property Trust Inc., July 26, 2021
• Starwood Property Trust Outlook Revised To Stable From Negative On Easing Asset Quality Risks; 'BB-' Ratings Affirmed, June 7, 2021
• Servicer Evaluation Spotlight Report™: Environmental, Social, And Governance Factors Have Consistently Powered Our Servicer Evaluation Rankings, Nov. 16, 2020
• LNR Partners LLC, June 29, 2020
• Servicer Evaluation Spotlight Report™: U.S. Commercial Mortgage Servicers Preparing For Impact From COVID-19, April 3, 2020
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019