Rationale

S&P Global Ratings' ranking on Brean Real Estate Solutions LLC (BRES) is AVERAGE as a commercial mortgage loan special servicer. On March 11, 2022, we affirmed the ranking (please see "Brean Real Estate Solutions LLC AVERAGE Commercial Mortgage Loan Special Servicer Ranking Affirmed; Ranking Outlook Neg," published March 11, 2022). The ranking outlook is negative.

Our ranking reflects BRES':

• Experienced senior managers with commercial real estate debt and special servicing operations experience;
• Limited staffing depth across the platform, albeit with resource support from its commonly-owned affiliate;
• A lack of an experienced loan workout asset manager;
• Short operating history as a venture formed in 2020;
• Adequately designed training program;
• Anticipated utilization of an industry-recognized third-party asset management and special servicing system;
• Adequate disaster recovery and cybersecurity protocols;
• Internal control environment built on a solid framework, but that has not been tested nor fully deployed; and
• Lack of a special servicing resolution track record within the current platform accompanied by no active special servicing volume.

Since our prior review (see "Servicer Evaluation: Brean Real Estate Solutions," published Jan. 12, 2021) the following changes and developments have occurred:

• The head of special servicing and surveillance departed the organization in October 2021. His responsibilities were assumed by a combination of the managing directors responsible for platform management and operations.
• In 2021, BRES transitioned from the RealINSIGHT asset management and special servicing system to the Backshop asset management and special servicing system.
• In 2021, training was focused primarily on the Backshop system and employees completed an average of 15 hours of formal training.
• No servicing mandates or appointments have occurred.

The ranking outlook is negative. BRES has invested in an industry-recognized asset management and servicing system and has built the infrastructure to be a capable commercial mortgage loan special servicer. However, its head of special servicing and surveillance departed the organization in October 2021 and there are no plans to replace him until BRES obtains a servicing mandate, leaving the current platform without an experienced asset manager. Further, the company has yet to secure any assignments during its operating history and as a result, has not built out its organizational chart, including adding experienced asset managers, since our last review. Currently, the head of the platform and the head of operations are the only full-time staff members as the company seeks to obtain initial mandates, which has proven challenging to date. These executives are supported by three analysts, who work for its similarly controlled affiliate's real estate debt strategies team, and a senior systems architect and developer via a consulting arrangement. The lack of traction in the execution of its business plan has delayed metrics in loan workout capabilities and internal controls to be evaluated. As a result, a continued inability to obtain meaningful special servicing mandates along with continued stasis in its staffing development could lead to a ranking downgrade.

In addition to conducting a remote site visit with servicing management, our review includes current Servicer Evaluation Analytical Methodology data through Dec. 31, 2021, as well as other supporting documentation provided by the company.

Profile

BRES is commercial mortgage loan special servicer that commenced operations in July 2020. The company, which is headquartered in New York City, is owned by a shareholder group that includes Quadrant Management Inc., Hunt Capital Holdings (Hunt), Rob Fine, and Rob Tirschwell. Messrs. Fine and Tirschwell comprise the leadership team of New York City-based Brean Capital LLC (Brean Capital), an independent investment bank providing services to institutional investors and corporate clients that include fixed income strategy, corporate finance, and advisory investment banking. Messrs. Fine and Tirschwell are both principals in Brean Capital and serve as CEO and Head of Trading, respectively. The aforementioned four shareholders also hold identical ownership percentages in Brean Capital.

Founded in 1978, Quadrant Management Inc. (Quadrant) is a principal investment management firm with over $3 billion in assets under management based in New York. Quadrant has an opportunistic investment philosophy and invests primarily in control positions of private companies in multiple industries around the world. Its chairman and CEO is also the chairman of Brean Capital.

Hunt, part of Hunt Cos., is a real estate investment manager with more than $46 billion in assets under management. Founded in 1947, Hunt Cos., based in El Paso, Texas, is a diversified, family-owned holding company that invests in operating businesses, real estate assets, and infrastructure assets. Hunt develops, invests, manages, and finances communities across the U.S., including affordable and market-rate multifamily developments, master-planned mixed-use communities, and homes for military service members and their families.

In July 2020, Brean Capital formed BRES to house the firm's special servicing and investment management platforms. BRES sits within Brean Capital's vertically integrated commercial real estate (CRE) debt platform, Brean Real Estate Debt Strategies (BREDS). The BREDS initiative was formed in January 2019 and commenced operations concurrent with the merger of Hunt Financial Services' broker-dealer business and Brean Capital. The BREDS initiative allows Brean Capital to provide a full-service CRE finance business that includes CMBS special servicing, non-performing loan (NPL) and real estate-owned (REO) management, investment management, origination, and distribution.

BRES was established to credit manage, co-invest, and service loans for retained and third-party CMBS B-Piece investments, NPL and REO portfolios, Hunt Cos. and Brean Capital affiliates' owned assets, as well as Brean Capital's financial institution's group clients and Brean Capital's sales and trading team's institutional clients. However, at present, BRES has yet to engage in any of these activities, has no assets in special servicing and has not completed a special servicing loan workout or REO sale in its short history.

Management And Organization

The management and organization subranking is AVERAGE.

Organizational structure, staff, and turnover

BRES' leadership team is comprised of a Managing Director, Head of Platform Management (MD-PM), who is located in the Brean Capital New York headquarters and the Managing Director, Operations (MD-O), who is located in Northern California and reports to the MD-PM. Each of the senior leaders has meaningful prior industry experience, including the build-out of start-up special servicing platforms, and they worked together in various capacities during the 1990. At present, each of these executives work out of their respective homes. Management has indicated it plans to open an office location in Northern California as a part of its operations team as it boards new business.

In addition, BRES leverages staffing resources from its Brean Capital affiliate. The MD-PM reports to Brean Capital's managing director and Head of Real Estate Banking, and three New York-based Brean Capital team members--one with 20 years of industry experience--are expected to have integral roles in supporting the platform. The aforementioned senior leaders (including the Head of Real Estate Banking) possess an average of 26 years of industry experience and comprise the investment/special servicing committee.

Management provided an aspirational organizational chart to depict its anticipated growth plans in conjunction with building a book of business. The organizational chart anticipates that, as it grows, the company plans to add experienced personnel to the BRES platform, including hiring a new Head of Special Servicing and Surveillance. It also envisions hiring a manager to oversee the compliance and investor reporting functions as well as a person dedicated to a centralized subcontracting function. It further intends to add experienced asset and REO managers and hire asset analysts that would support the asset managers focusing on compliance-related actions, reporting, and other administrative tasks. At present, however, the MD-PM also serves as a loan asset manager, and the MD-O performs the needed operational and compliance functions.

BRES' senior managers' average industry experience level is generally in line with other S&P Global Ratings-ranked CMBS special servicers. We also note that the above outlined aspirational organizational structure is similar to other special servicers we rank. However, our overall assessment is constrained by the lack of depth and our current inability to assess personnel who have yet to be hired, including experienced asset managers. Further, because BRES is a relatively new operation, company tenure levels and turnover metrics are not meaningful across the platform (see table 1 for BRES' experience and tenure levels).

Additional resources supporting the BRES platform are provided from a shared services agreement (SSA) with Brean Capital, wherein Brean Capital provides certain non-servicing administrative support functions and non-personnel services to BRES. These areas of support include but are not limited to, accounting/finance, human resources, risk management, insurance, and information technology.

Table 1

Training

BRES maintains a formal training policy, which includes instructor-led training, web-based training, and other external educational resources. Other noteworthy aspect of training at BRES include the following:

• The firm maintains a policy that employees receive a minimum of 30 hours of training. It reported that on average its employees completed 15 hours of formal training during 2021. When supplemented with informal cross-training performed between senior management and attendance at industry conferences such training averaged approximately 33 hours.
• In 2021, formal training was focused primarily on systems required to perform job functions, including the Backshop servicing system as well as training associated with information security; all employees also participated in mandatory HR training.
• All new employees are required to complete interactive online mandatory harassment and discrimination training within the first 60 days (and annually thereafter). Within the first 90 days, all employees must participate in sessions covering cybersecurity, phishing awareness, information security, customer data protection, and conflicts of interest. The courses are offered through a third-party vendor.
• The MDs assess skill levels and the work experience of the special servicing team and identify areas where training would be most beneficial. In addition to bringing in industry experts to cover specific topics in their respective field (appraisal, environmental, title, legal, etc.), BRES offers internal training that covers pooling and servicing agreements (PSAs), net present value (NPV) analysis, resolution strategies, case writing, communication and documentation.
• Employees are encouraged to participate in external training opportunities such as those provided by CREFC and the MBA.
• The MD-O manually tracks training hours for any seminars/online training courses completed by employees. If the training is held on site, an attendance sheet is completed and sent to the MD-O. If not part of an on-site session, employees send an email to the MD-O whenever a course is completed including the training topic, the date of training, and the number of hours attended.

Systems and technology

BRES has established the architecture for an effective systems and technology environment, including an industry recognized asset management and servicing system, along with the requisite disaster recovery and cybersecurity programs. These areas are discussed in the below subsections.

Servicing system applications  

BRES's key systems include the following:

• Backshop is the servicing system of record, replacing Real Insight in the first quarter of 2021, which was initially engaged to provide an asset management systems solution. Given that no assets have been boarded into the system, there was no need for a systems transition.
• Backshop is a comprehensive commercial real estate portfolio asset management system that provides custom report writing capabilities along with features that allow it to generate CREFC reporting based on the data and information in the system. Business plans, ASRs, and NPV calculations can be issued from Backshop and then exported into excel to be completed and sent to external parties.
• Within Backshop, workflows are used to aid in the delegation of authority, tracking of tasks, responsible parties, and prioritization of tasks around an organized and standardized set of processes and checklists.
• Numerous other internal reports can be issued from Backshop including tickler reports and other alerts for asset managers.
• BRES intends to utilize Microsoft Dynamics as its accounting system for REO properties.
• Third-party data sources include, but are not limited to, Costar and Bloomberg.

Business continuity and disaster recovery  

BRES maintains a business continuity and disaster recovery plan (BC/DRP) designed to quickly recover and resume operations and which is reviewed no less than annually. Details of its BC/DRP and environment include the following:

• The BC/DRP plan is tested annually and BRES performed its first plan test on Aug. 11, 2021, with no issues.
• Servicing data is hosted by CMBS.com's Backshop software application housed in Microsoft Azure with additional backup in Amazon Web Services. CMBS.com performed its last disaster recovery test on June 12, 2021, with no issues.
• In the event of a recovery situation, Backshop's primary database is located in Azure West US. A failover database in Azure East US is continuously synched with the primary database; recovery in the event of a failover is expected to occur within 5-10 minutes.
• BRES benefits from having multiple Brean Capital affiliate offices around the country to the extent staffing needs to be temporarily relocated in the event of an emergency affecting the New York home office. However, since inception, the leadership team have worked remotely, of which all employees have such ability. Upon hire, Brean Capital ships the necessary hardware and software to the employees' remote work location.
• BRES uses Microsoft 365 Business Premium along with Microsoft 365 Business Voice. The networking infrastructure is comprised of a global portfolio of data centers, servers, content distribution networks, edge computing nodes, and fiber optic networks to provide global distribution of services to help spot, diagnose, and manage the cause of any disruptions.

Cybersecurity  

BRES has a cybersecurity environment designed to protect confidential data and mitigate cybersecurity attacks. Key aspects of the program include the following:

• BRES utilizes Microsoft 365 Business Premium, a cloud-based security solution, to defend against advanced cyberthreats with phishing and ransomware protection, control access to sensitive information by using data encryption, secure the devices that connect to BRES' business, and help keep data on its applicable devices secure and up to date.
• Features in Microsoft 365 Business Premium include advanced threat protection, data loss prevention policies, exchange online archiving, Azure information protection, and Intune.
• VPN multifactor authentication is required to access systems or applications.
• BRES maintains a formal cybersecurity insurance policy and has access to legal counsel for cybersecurity matters.
• In April/May 2021, Brean Capital engaged a third-party vendor to conduct a vulnerability assessment and intrusive penetration test on Brean Capital LLC and subsidiaries. The scope for security testing included the external and internal IT infrastructure. The findings concluded the organization is at a low level of risk for exploitation. It intends to continue to have a third-party conduct network penetration testing performed annually as a component of its BC/DRP testing.
• Unlike most of our ranked servicers, BRES does not send test phishing emails to its employees to increase awareness on cyberattacks.

Internal controls

BRES has established the framework for a solid internal control environment though it is nascent and has not been tested. The framework includes thorough policies and procedures (P&Ps), compliance and quality assurance testing, and an internal audit program that is expected to be outsourced.

P&Ps  

BRES' special servicing P&Ps are thorough and well thought-out, in our opinion, reflecting the special servicing knowledge and experience of its senior managers. Employees can access the P&Ps on the shared network drive via VPN, or in the cloud via the Microsoft Teams application.

Included in each policy document are the responsible parties along with a reference to any relevant documents that are included as exhibits within the manual. In addition, a set of desktop procedures support the use of Backshop.

Nonetheless, due to a lack of special servicing activity, the P&Ps have yet to be tested; therefore, they will likely need updates as BRES builds its named special servicing portfolio and begins to perform loan workouts and REO asset management and disposition activities. Management indicated that it plans to review and update its P&Ps on an annual or, as needed, more frequent basis.

BRES has a well-defined servicing delegation of authority (DOA) matrix, which articulates which special servicing actions can be approved by the department head and which actions require investment committee (comprised of the aforementioned three senior executives) approval. Workflows are used to aid in the DOA, tracking of tasks, and prioritization of tasks around a standardized set of processes and checklists for responsible parties.

Compliance and quality control  

At the outset of operations, compliance with PSAs and other servicing agreements P&Ps will be overseen by the MD-O. The organizational chart envisions the hiring of a dedicated compliance manager that would report to the MD-O and whose main functions would include the following:

• Implement, monitor, and administer a comprehensive audit and review of compliance with the requirements and limitations as set forth in servicing agreements and company policies at all times.
• Maintain a process of comprehensive management reporting that provides timely and relevant information on all aspects of audit and compliance issues.
• Abstract key requirements of all servicing agreements, storing them on Backshop for staff use.
• Review asset management tickler reports monthly to ensure outstanding or upcoming issues are addressed in a timely manner.
• Review required notices sent to PSA parties in order to confirm the timely and accurate completion and submittal.
• Report any deficiencies in compliance to senior management.

Internal and external audits  

The company does not have a stand-alone internal audit department. BRES anticipates outsourcing internal audit to an independent audit/servicing compliance vendor with experience in auditing commercial real estate servicers to perform the function once it boards assets.

BRES was not subject to any external audits in 2021 because it has yet to be engaged under any servicing agreements. As it develops its servicing platform, it plans to retain a qualified accounting firm to conduct a Reg AB report to evidence its internal controls and highlight compliance with the PSAs, its P&Ps, and generally accepted servicing standards.

Insurance and legal proceedings

BRES currently maintains directors and officers as well as errors and omissions insurance coverage. Going forward, BRES indicated it intends to maintain coverage in accordance with the requirements of its servicing agreements and other contractual requirements.

As of the date of this report, BRES reported that it is not currently facing any servicing-related litigation matters.

Loan Administration – Special Servicing

The loan administration subranking is AVERAGE for special servicing.

BRES is not currently appointed on any CMBS transactions, does not currently have an active special servicing portfolio (see table 2), and lacks a track record of loan resolutions (see table 3) and REO sales (see table 4). Therefore, the special servicing loan administration subranking considers BRES' senior managers' experience and track records in previous special servicing roles. It also considers our review of its special servicing P&Ps, which demonstrate a proactive and thorough approach to loan resolutions and REO sales.

Table 2

Table 3

Table 4

Loan recovery and foreclosure management

BRES' P&Ps describe properly controlled loan workout and foreclosure management processes. Highlights include the following:

• The asset manager (AM) sends a "hello" letter to the borrower within five days of a special servicing transfer along with a standard pre-negotiation agreement, which must be executed by the borrower prior to substantive workout discussions, and a request for updated property-level information and financial statements of the obligor(s) and guarantor(s).
• A new loan checklist is prepared by an asset analyst to outline and document required tasks necessary to be completed within five days as well as the first 30 days following transfer, which is reviewed and approved by the AM and the compliance manager.
• The AM is responsible for reviewing the loan documents and existing third-party reports. Based upon information provided in the file, PSA requirements, other lender agreements, and initial contact with the borrower, the AM will determine the need for an appraisal, property inspection, and engagement of legal counsel.
• The AM may inspect the property or outsource the inspection to a third-party vendor. Market information will be solicited from local real estate brokers to determine the current state of the local market of the mortgaged property.
• The loan AM prepares the asset business plan using a standard template within the timing specified in the relevant PSA or otherwise in no more than 90 days from transfer.
• Business plan components include a loan summary; borrower and guarantor descriptive information; collateral description; property operating data; cash flow analysis; current market conditions; property photographs; and the recommended resolution strategy, accompanied by an NPV analysis of scenarios considered.
• Business plans require approval per BRES' DOA, and the asset analyst is responsible for obtaining any necessary investor approvals (i.e., controlling class certificate holder). If there is a change to the action requested in the approved business plan or if six months has elapsed since approval, an updated business plan is required for approval.
• If foreclosure is the recommended strategy, the AM will seek to identify potential property managers and prepare a preliminary 120-day REO budget for inclusion in the business plan along with a recommended foreclosure credit bid amount.
• A foreclosure pipeline report will be used track foreclosure activity and is contemplated to be used to assist in transferring a loan from a loan AM to an REO AM. However, we note that currently there is no distinction amongst loan and REO AMs.
• A foreclosure checklist will be used to ensure that appropriate notifications, and asset due diligence (i.e., title search, outstanding tax assessments, etc.) is performed prior to foreclosure. Further, unless the PSA states otherwise, an environmental site assessment no less recent than 12 months old and indicating that there are no material environmental hazards present at the mortgaged property must be on file prior to completion of the foreclosure.

REO management and dispositions

BRES' P&Ps call for proactive REO management and sales oversight utilizing good controls. Notable aspects include the following:

• The REO AM solicits request for proposals of prospective property managers (PMs) with interested parties providing a proposed operating budget as a part of their proposal. The REO AM's PM selection, which requires DOA approval, is engaged prior to the completion of foreclosure in order to allow the PM immediate access to the property.
• An initial REO business plan (REO plan) must be prepared by the AM and presented to the committee per the DOA within 120 days after loan conversion to REO. The REO plan will include a marketing plan, targeted sale data, and a 12-month property manager operating budget for the property, including its funding requirements.
• The REO AM oversees the PM's performance, including the expectations for timely submission of all items required in a standard monthly reporting package, which is reviewed to monitor the ongoing performance of the property, including a review of budget vs. actual performance, property operating issues, leasing activity and monitoring, and sweeps of excess cash flow for application against the loan.
• Prior to listing the property for sale, the REO AM must prepare a business plan that recommends and substantiates a listing price. Further, any brokerage or leasing engagements require obtained via the DOA.
• After the marketing process has commenced, the REO AM monitors the ongoing efforts. An approved business plan pursuant to the DOA is also required prior to acceptance of an offer.
• Once the terms of the REO sale have been negotiated and fully approved, legal counsel must be engaged to prepare the required documentation for the transaction. REO asset analysts notify all necessary parties after the asset is sold.

REO accounting and reporting

BRES' documented controls and procedures for property-level accounting and oversight are adequate. Highlights include the following:

• Prior to the conversion to REO, the AM will initiate an action plan to monitor and control any cash generated by the property until a PM can be engaged and bank accounts can be established.
• After an asset accountant opens an operating account (which the property manager uses to deposit income and pay property expenses), the AM in conjunction with the property manager determines the funds required to operate the property for the initial 30-120 days.
• The REO AM, in conjunction with an asset accountant, will review the monthly PM reports and reconcile against the REO bank statements to ensure that net operating income is properly controlled and reported.
• Pursuant to the P&Ps, the MD-PM will engage the services of an independent CPA firm on an annual basis to perform audits on select REO properties. The audit assesses whether the PM is meeting the performance obligations under the property management agreement and that cash handling controls are established and adhered to, as well as PM compliance with monthly reporting requirements and reconciliations.

Subcontracting management

BRES expects to execute subcontracting agreements to engage professionals for a variety of real estate related services and also intends to enter into formalized agreements with oversight contractors who specialize in the solicitation, engagement, and review of appraisals and environmental site assessments.

• BRES expects to eventually centralize the subcontracting function and has plans to hire a dedicated subcontracting administrator. Reporting to the MD-O, this position will coordinate and facilitate the direct award engagement of vendors that perform services including BOVs, property inspections, property condition assessments, property managers, listing brokers and leasing agents. The position is also responsible to ensure documentation is accurate, completed, reviewed, and properly approved.
• BRES intends to track vendor performance in Backshop for each service provider on an assignment-by-assignment basis. In addition, oversight contractors engaging third party service providers on behalf of BRES will maintain approved vendor lists and will not recommend a vendor with unsatisfactory performance.
• Legal, environmental, and appraisal services will be managed via the use of oversight contractors. Those contractors will have a direct reporting responsibility and be accountable to the MD-O as well as the asset managers they are performing work for on any given assignment.
• Oversight contractors (legal, appraisal, and environmental) and dedicated site inspection firms will be required to complete a vendor cybersecurity due diligence questionnaire tailored to the vendor type, assignment type, and IT environment. The MD-O will ensure that all internal IT conditions are met prior to engagement and the vendor will be reviewed annually thereafter.
• All BRES vendor agreements must contain a clause that requires vendors to report any cybersecurity breach as soon as possible after it takes place. In addition, confidentiality agreements are required to be executed in the event that sensitive borrower, property data is exchanged pursuant to specific engagement P&Ps.

Performing loan surveillance

BRES' P&Ps contain an industry standard approach as to how it intends to monitor performing loans for all portfolios where it is appointed as special servicer. Aspects of BRES's performing loan surveillance include:

• Utilizing Backshop each month an asset analyst will prepare a report on all performing loans based upon risk criteria. Loans will be rated either red, yellow, or green based on such criteria. Red loans will be discussed with the master servicer to understand the identified risks; yellow loans will be closely monitored and selectively discussed with the master servicer; and green loans are determined to be low risk with limited chance of transfer to special servicing. The potential pipeline of servicing transfers is measured by this risk classification.
• AMs are each assigned as deal leads and are responsible for reviewing results with the asset analyst and leading the monthly discussion with the master servicer to review the red loans and select yellow loans.
• Senior management will also attend and oversee the monthly reviews with the master servicers.

Borrower requests

Though BRES has yet to review a borrower request as special servicer, its P&Ps provide detailed instructions for different request types, including performing the necessary underwriting when applicable. Further, its asset management team is experienced in these functions.

An AM will review all incoming borrower requests and will prepare a comprehensive asset business plan that includes recommendations and substantiation to either approve or deny the request. Similar to specially serviced loans, the business plan would require internal approval via its investment committee approval process or via the DOA.

Legal department

BRES does not have in-house legal staff dedicated to supporting the legal function. It intends to eventually engage an outside law firm with CMBS industry experience to serve as its oversight counsel to provide guidance on REMIC issues, complex matters, and to engage local counsel as needed to enforce remedies in the market where the property resides. Other notable aspects of how the legal function is expected to be controlled include:

• AMs will instruct oversight counsel to solicit multiple law firms to request proposals. Upon evaluating the proposals, the AM will use oversight counsel to prepare BRES's standard engagement letter of the selected law firm.
• AMs must review and approve legal bills before the accounting department makes any payment.

Financial Position

The financial position is SUFFICIENT.

Related Research

• Brean Real Estate Solutions LLC AVERAGE Commercial Mortgage Loan Special Servicer Ranking Affirmed; Ranking Outlook Neg, March 11, 2022
• Select Servicer List, Feb. 4, 2022
• Servicer Evaluation: Brean Real Estate Solutions LLC, Jan. 21, 2021
• Servicer Evaluation Spotlight Report: Environmental, Social, And Governance Factors Have Consistently Powered Our Servicer Evaluation Rankings, Nov. 16, 2020
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019