Rationale

S&P Global Ratings' rankings on Lima One Capital LLC (Lima One) are AVERAGE as a small balance commercial mortgage primary and special servicer. On Aug. 24, 2023, we assigned the rankings (please see "Lima One Capital LLC Assigned AVERAGE Small Balance Commercial Mortgage Primary And Special Servicer Rankings," published Aug. 24, 2023). The ranking outlook is stable for each ranking.

Our rankings reflect Lima One's:

• Internal training program that is holistic in its approach to training staff in all areas of servicing and tracking through a learning management system;
• Improvements in its internal control environment, including the centralization of compliance functions and the launch of a risk self-assessment program;
• Continued investment in technology to support operations, including the implementation of multiple systems to support default management;
• Year-over-year portfolio growth;
• Generally competitive servicing metrics compared to peers;
• Significant changes in servicing management, with five of its seven managers hired in 2022; and
• Lack of formal tracking of default attorney or real estate-owned (REO) asset management company performance.

The ranking outlook is stable for each ranking. We feel that Lima One has developed its people, processes, and technology to effectively service its portfolio in a controlled environment.

In addition to conducting a meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through June 30, 2023, as well as other supporting documentation provided by the company.

Profile

Lima One Capital began operations in 2010. Intending to be the sole owner of Lima One, Lima One Holdings LLC was created in 2015. Lima One originates loans to real-estate investors on non-owner-occupied properties in 46 states and the District of Columbia. Products offered include residential transition (fix-and-flip), new construction, rental, and multifamily loans. The bulk of the loans are sold to investors with servicing retained. Lima One's 40-person servicing staff is in its Greenville, S.C., site and manages servicing assets, in aggregate, of approximately $3.4 billion (see table 1). Lima One also has an operations center in California but no servicing functions are currently performed in this site.

In July 2021, MFA Financial Inc. (MFA; a REIT) acquired the membership interests of Lima One Holdings LLC. Prior to the acquisition, MFA was a minority owner of the company. Management has indicated that MFA has provided Lima One dedicated, more efficient access to financing channels. This has allowed Lima One to rapidly scale its origination and servicing platforms.

Table 1

Lima One's servicing portfolio consists of business-purpose loans used for long-term financing, rehabilitation, or as a bridge loan for non-owner-occupied single- and multi-family properties. Lima One's loan portfolio has more than doubled in loan count since December 2020 after originations declined in 2020 due to the COVID-19 pandemic.

The portfolio under review is geographically dispersed, with no concentration of loans in a single state (see table 2).

Table 2

Management And Organization

The management and organization subranking is AVERAGE for commercial small balance primary servicing.

Organizational structure, staff, and turnover

Lima One's organizational structure includes a management team with good industry experience. Six people directly report to the CEO in the organization: the chief financial officer (CFO), the chief marketing officer (CMO), the chief operations officer (COO), the chief revenue officer (CRO), the chief servicing officer (CSO), and the senior director of human resources.

The servicing functions are split into core servicing and servicing operations; managed by two directors reporting to the CSO. The director of servicing operations oversees default servicing and reporting and analytics. In July 2022, an experienced director of core servicing was hired to lead the customer relations management, cash management, investor reporting, and escrow administration teams, replacing the prior director who left Lima One in April 2022. Lima One services all products using the same servicing staff. Lima One contracts with a subservicer for a portion of the Rental30 product.

Lima One made multiple servicing management changes in 2022 and, while Lima One's management team exhibits good levels of industry experience, it is lower than peers. Tenure levels for both management and staff are also lower than peers. Total turnover of 21% is higher than the average reported by peers.

A dedicated acquisition specialist with experience in recruiting was hired in 2022. Staff positions are typically sourced through local universities and job fairs, while recruiters may be used for positions more difficult to fill.

Training

A learning and development specialist was hired in 2022 to review and update all training materials and documents. New-hire training consists of a weeklong introduction course where representatives across the company provide an overview of Lima One's products and functions. New hires have required compliance training during the initial week. New hires in loan servicing are then moved to the floor, where they shadow all areas of servicing, including all groups in default and support functions. The new hire's supervisor performs the final phase of training by assigning tasks to the trainee, and each task is reviewed by a peer or supervisor. New hires must pass all tasks assigned to complete the training.

Lima One uses a learning management system to manage courses and track completion. Lima One utilizes the Mortgage Bankers Assn. courses and certifications in its training regimen. All employees are assigned courses, which include 12 compliance courses, to be completed quarterly. Courses are assigned cross-functionally so that staff receive training outside of their area of expertise. Employees have time set aside to complete their assigned training.

We believe that Lima One's new-hire and on-going training programs are comprehensive, and that training staff on all aspects of the operations is a good practice, especially for smaller companies.

Systems and technology

We believe Lima One has effective technology to meet its primary servicing requirements and that it has well-designed data backup routines and disaster recovery preparedness.

Servicing system applications 

Lima One uses the following applications for servicing:

• The Mortgage Office, a cloud-based loan servicing platform;
• Black Knight LoanSphere, used for foreclosure, bankruptcy, and invoice management;
• RES.NET, an asset-management platform;
• Sage Intacct, an accounting software;
• Paymentus, an electronic funds payment application; and
• Five9, a Voice over Internet Protocol phone and dialer system.

Lima One has focused on improving its technology environment over the last few years. In first-quarter 2022, Lima One implemented Black Knight LoanSphere to manage the foreclosure/bankruptcy and invoice processes. Additionally, Lima One implemented RES.NET for its asset management platform in May 2022. Lima One began the rollout of a new loan origination system and loan boarding interface in third-quarter 2023.

Business continuity (BC) and disaster recovery (DR) 

The BC plan relies on the ability to remotely access all systems via company-issued computers. Lima One operates in a hybrid work model with remote work one day a week; this helps ensure that staff can work from home if the BC plan needs to be implemented.

We considered the following features of Lima One's BC and DR plans:

• The offsite data storage locations are located more than 25 miles from the servicing office on separate power grids.
• Local backups are synched every hour, and a replication of the backup is saved in cloud storage.
• Target recovery time for all servicing functions is four hours.
• DR testing is performed annually. The most recently completed DR test was performed April 21, 2023, for which management stated there were no exceptions.

Cybersecurity 

We believe the company has a well-developed system to detect and respond to information security threats. Lima One uses a vendor to perform penetration testing annually. The last test was performed from Dec. 2-29, 2022, with a retest performed between Feb. 7-16, 2023. There was one critical and four high-rated exceptions noted in the original testing, which Lima One says have been remediated. Furthermore:

• Lima One maintains a formal incident response plan.
• A managed service provider is used to perform network monitoring and audits.
• A web security application filters web content.
• There is endpoint protection on all devices.
• Lima One performs semiannual phishing simulation exercises and training.
• Phishing detection and remediation software is used, and staff can send suspect emails directly to the vendor to assess for validity.
• Lima One maintains a cyber insurance policy.

Internal controls

Lima One has been formalizing and implementing changes to its internal control environment for the last few years. The senior director of legal and compliance joined the company in January 2021 and has centralized the compliance functions. A risk self-assessment program was launched and implemented in some of the servicing groups in 2022, and the expansion of the program across servicing is expected to continue throughout 2023.

Taking into consideration the size of the organization, the new compliance program, the use of a third party to perform an annual internal audit, and the annual Regulation AB (Reg AB) attestation, we believe Lima One has a solid foundation for its control framework.

Policies and procedures 

Lima One maintains standard operating procedures (SOPs), which are reviewed annually. Changes are tracked and logged, and updates require compliance approval before publication. While the format is not standardized across departments, all SOPs contain relevant screenshots, sample letters, links to other documents, and step-by-step instructions for tasks. Changes to SOPs that occur outside of the annual recertification require review by the department director prior to submitting to compliance for approval and updating the document.

Quality assurance (QA) 

The first line of defense consists of quality monitoring measures within some of the servicing business units. Management indicated that it has begun reviewing its processes to identify risks and controls, evaluate the strength of the current controls, and modify controls, as needed. It has finished the review in some servicing areas with plans to complete all operations areas in 2023.

Current front-line QA and control activities include the use of exception, data, and reconciliation reports to validate the accuracy of transactions performed by the loan boarding, payment application, and tax and insurance departments. Lima One also uses peer reviews of specific tasks as part of its first line of defense.

Managers within the customer service department perform QA call reviews. A total of 24 calls (three inbound and three outbound per week) per agent are monitored monthly. Calls are scored on a scale of 100 using a scoring sheet. Any calls receiving a score less than 90 are used by the manager in a coaching session with the agent.

Compliance and quality control 

Lima One does not have a formal compliance testing program; however, in 2021 Lima One hired a general counsel who, among other duties, is responsible for ensuring compliance with regulatory requirements. Lima One also uses a law firm specializing in compliance to monitor and identify regulatory matters requiring attention.

In April 2023, Lima One began a phased implementation for quality control (QC) testing to be performed by a vendor. The vendor performs the sampling and review, provides preliminary findings to management, then issues the final report to the senior and executive leadership team as part of the planned process. A copy of the proposed schedule was provided, which includes reviews of most of the loan administration and default processes; however, we noted that the review schedule does not include reviews of investor accounting and reporting, and the REO department/processes. A QC and exam coordinator was hired in 2023 who is responsible for validating remediation plans and confirm they are working as designed.

Internal and external audits 

Lima One uses an external vendor to perform its annual internal audit. The audit covers all servicing operations. We were provided the audit completed in 2022, which we found to be fairly comprehensive, although there were no details regarding the sampling methodology. Individual findings are assigned one of three risk ratings: low, medium, or high. An overall rating of unsatisfactory, needs improvement, satisfactory with recommendation, or satisfactory is assigned to the full audit. For the 2022 audit, there were no risk items identified and the overall rating was satisfactory.

In addition to the review of the internal audit report, Lima One provided the Reg AB report for 2022, which noted no areas of material non-compliance.

Vendor management

Because of its size, Lima One does not have a centralized vendor management group. Since being acquired by MFA, the company now uses a service-as-a-software provider for vendor key-date tracking, which is managed by compliance. Lima One maintains formal vendor requirements and monitoring, that include:

• A standardized request for a proposal process and required documents when engaging a new vendor;
• Risk rating vendors based on total costs, frequency of interaction, and customer contact, which drives the frequency of regular meetings (monthly or quarterly);
• Relationship management and vendor oversight, which is maintained at the departmental level;
• Quarterly vendor scorecards, which include performance against contractual service level agreements;
• Vendor visits on site as needed; and
• Vendors that are required to submit updated documents for review at least annually.

Lima One uses a subservicer for a small portion of its Rental30 servicing portfolio (i.e., 130 loans as of June 2023). Lima One uses automated daily reporting to monitor its subserviced loans. A biweekly touchpoint meeting is held with the subservicer to review delinquency and default servicing.

Insurance and legal proceedings

Lima One 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, there were no material servicing-related pending litigation items.

Loan Administration--Small Balance Commercial Primary Servicing

The loan administration subranking is AVERAGE for commercial small balance primary servicing.

Lima One's loan servicing department is divided into core servicing, servicing operations, and special servicing.

A subservicer handles the primary servicing for a small portion of the securitized portfolio. For non-subserviced accounts, customers are assigned to individual servicing analysts. This assignment ensures borrowers with multiple loans have a single point of contact across all of their accounts. Accounts transition to special servicing on the 35th day of delinquency.

Lima One engaged a print vendor in November 2022 to produce borrower notices. Notices are transitioning to the new vendor in phases with the final group expected to be implemented by the end of 2023.

Lima One's primary servicing portfolio has had year-over-year increases (see table 3).

Table 3

New-loan boarding

Lima One boards new loans electronically from its loan origination system through a daily batch system upload. In 2022, 5,317 loans were boarded, a 128% increase from 2021. An additional 2,183 loans were boarded during first-half 2023.

Controls and other features of new loan set-up include:

• A review of 156 datapoints is performed on all loans boarded, an increase from 57 data points reviewed at the time of our prior review;
• A new pre-close exception review and post-boarding document-to-data review;
• A welcome letter that is automatically generated from the loan boarding;
• A vendor to complete the trailing document follow-up, with Lima One reporting 1.02% of trailing documents outstanding on loans boarded more than six months; and
• A unique identifier tying together borrowers with multiple loans.

Payment processing

Lima One uses a lockbox vendor for check processing and an electronic remittance vendor. The vendors transmit daily files, which are uploaded to the servicing system. Any payments included in the file that do not match the amount due are held in suspense. The payment processing team then works with servicing to determine the appropriate posting for suspense items. Highlights of payment processing include the following:

• The electronic payment capture rate is 99%, including Automated Clearing House and payments made through the online payment remittance system.
• Suspense reports are published daily. There were no unidentified items aged more than two days remaining in the clearing account or aged suspense items as of the reporting date.
• Payments are deposited to the clearing accounts by the vendor.
• Accounting reconciles the deposits to the vendor payment report and to the payments applied in the servicing system.

Investor reporting

The previous investor reporting manager left the company in September 2022 and, in November 2022, Lima One hired a new manager with more than 24 years' experience in cash operations and investor reporting. The department is made up of the manager and three staff who are all cross-trained to manage all investors. With the acquisition by MFA in July 2021, the bulk of the portfolio shifted to loans on balance sheets from third-party investors (see table 4), although the servicer has experience with securitizations.

Table 4

Other highlights include that:

• Automated investor reports are reviewed and approved by the investor reporting manager before remittance and submission to the investor.
• The servicer has 100% electronic remitting and reporting to investors.
• A dedicated staff member performs the reconciliation of the investor accounts monthly and payoff reports weekly.
• There were no aged unidentified items in custodial accounts.

Escrow administration

In June 2022, Lima One hired a new manager with more than 20 years of industry experience to lead the escrow department. The new escrow manager has combined both the tax and insurance teams, and the department now consists of the manager and four analysts. Two analysts are focused on tax and two analysts are focused on insurance, while all the analysts have received high-level cross training. Lima One uses vendors for tracking taxes and insurance. The insurance vendor manages the letter cycle for loans with lapses in coverage, while Lima One manages borrower calls. Insurance disbursements are made by Lima One. Lima One manages the loss draft process and uses its construction management team to review the claims and improvements. While we generally believe the use of a vendor to manage loss drafts is more effective, we feel Lima One's ability to leverage its construction management group and associated infrastructure is a better way to manage the process in their circumstances. As with insurance, Lima One handles all borrower calls for taxes, but disbursements are made directly by the vendor to the taxing authorities based on payments remitted to the vendor by Lima One.

Other features include the following:

• Of all the loans, 68% are escrowed for taxes and insurance.
• The servicer continues to report high non-reimbursable tax penalties paid, which it said resulted from issues with the tax vendor failing to submit disbursement requests for tax bills to Lima One in a timely manner. Management indicated that it paid the late fees resulting in the untimely billing but is seeking reimbursement from the vendor. We will monitor this metric for improvement.
• Renewal notices for insurance policies are sent 60 days prior to policy expiration.
• A forced-placed policy, which provides for a 365-day look-back period, is in effect.
• Life-of-loan flood contracts are in place for tracking flood zones, and flood maps and coverage are reviewed annually.

Asset and portfolio administration

We believe Lima One effectively monitors credit and asset performance. In our view, its policies governing operating statement requests and property inspections are practical. Highlights and controls of the process include that:

• Though not required to perform CRE Finance Council watchlist reporting, an internal watchlist is maintained and loans are flagged within the servicing system.
• Annual financial statements and quarterly rent rolls are required for all Rental30 premiere and multi-family loans. Analysts follow up for delinquent documents 30 days after the reporting period and biweekly thereafter until the documents are received. The collection rate of the year-end financials as of June 30, 2023 (the end of the reporting period) was 31.6%, higher than we see with other small balance commercial mortgage servicers.
• Financial statements and the associated analyses are retained within the servicing platform. Any issues identified in the analyses are referred to the investor for review and recommendation for action, if needed.
• Property inspections are conducted by a vendor. Inspections are triggered based on the loan delinquency or as specified within the servicing agreement. In first-half 2023, 1,315 properties needed inspections, all of which were completed within 30 days of the due date.
• There are 88 loans with Uniform Commercial Code filings, none of which have lapsed.

Customer care/borrower requests

Lima One has a customer service team of eight analysts and a supervisor who reports directly into the customer relations manager. Each analyst is assigned a group of specific borrowers and is the primary point of contact for all loans those borrowers have with Lima One. We believe this model is effective for Lima One to support its initiatives to promote repeat business.

Lima One's marketing team sends surveys to a random selection of 50 customers from those with servicing interaction the prior week. In addition to the random surveys, the servicing analysts have agent-specific survey links embedded in their email address. Feedback from customers on agent performance is reviewed weekly and used for agent coaching.

Borrower requests for capital expenditure payments are managed through the escrow administration department. Requests are reviewed to validate that the loan is eligible for a disbursement and that all information is provided by the borrower. Once validation is complete, the escrow senior analyst will approve the disbursement, except for payments of more than $10,000, which also require approval from the director of servicing operations.

For short-term loans nearing maturity, notices are sent 90, 60, and 30 days in advance of the maturity date to notify the borrowers of the upcoming maturity and to ascertain the maturity solution. The notices include details on the application and process for applying for an extension.

Early-stage collections

Eight servicing analysts handle early-stage collections. A combination of email and text messages are sent to the client during the month the payment is due. Outbound text messages are sent after the borrower is 15 days delinquent. The timeline for early collections is:

• The borrower is sent two text messages (five and 10 days after the due date) as payment and late-charge date reminders.
• An email notice is sent 15 days after the due date, and text messages are sent every two business days after the grace period has passed.
• Manual calls start on the 21st day of delinquency and are made weekly until the loan is transferred to special servicing loss mitigation.
• Delinquency rates are reviewed daily to track collections versus the prior month.

In August 2022, Lima One implemented a review process where the manager, team lead, and a portfolio analyst review the collection rates and discuss the best strategy to move forward. These meetings allow for the portfolio analysts to better understand the corporate strategy and allow management to get insights on trends seen by the portfolio analysts.

Loan Administration--Small Balance Commercial Special Servicing

The loan administration subranking is AVERAGE for small balance special servicing.

Special servicing is managed under the director of servicing operations and comprises the loss mitigation, foreclosure and bankruptcy, and REO departments, each with three staff. Starting in 2020, Lima One began the build-out of its default servicing operations, including hiring new management and staff, developing loss mitigation solutions, and implementing new technology. The staff and processes were in place in 2021, with the technology implemented in 2022. Because of the new personnel, management and staff have good industry experience levels but company tenure is much lower than reported by peers (see table 5).

Table 5

Loans flow to special servicing when they become 35 days delinquent or at maturity. The special servicing portfolio has remained relatively flat since 2021 (see table 6).

Table 6

Loan recovery and foreclosure management

Lima One utilizes a high-touch, asset-level approach to resolve nonperforming loans. Key points include:

• Proactive timelines that are utilized to initiate borrower contact through telephone calls, emails, texts, and letters;
• Outbound contacts made at varying days and times to attempt contact;
• System-generated written notices sent to delinquent borrowers at pre-established past-due dates; and
• A review of all the loans for borrowers with multiple loans serviced by Lima One is completed to identify strategic solutions for the borrower's portfolio.

Lima One pursues a dual-track model in which it continues efforts to resolve the default with the borrower while the company enforces legal remedies.

The company utilizes multiple options to resolve special servicing assets (see table 7). For solutions where it does not have delegated authority, loss mitigation workout proposals are reviewed by a manager prior to submission to the investor. It does not have a loan resolution system to manage workout options or workflow.

Table 7

Lima One effectively manages foreclosure and bankruptcy proceedings with comprehensive oversight of those cases. Key default items include the following:

• Lima One uses the Black Knight LoanSphere platform to track foreclosure and bankruptcy cases, which it implemented in first-quarter 2022.
• A pre-foreclosure checklist is completed by loss mitigation prior to submitting the referral request to the investor for approval.
• Referrals are automatically updated in LoanSphere on a weekly basis from The Mortgage Office.
• Milestones are monitored by Lima One's assigned foreclosure specialist and updated in The Mortgage Office on completion.
• Bid recommendations are submitted to the investor for review 30 days prior to the scheduled sale date.
• A vendor is used for vacant property registration.
• There is no service used to identify new bankruptcy filings, so Lima One relies on notification from borrowers, the court, or the foreclosure attorney.
• Due to the limited number of loans in bankruptcy, they are monitored by the foreclosure specialists.
• There is no formal attorney vendor scorecard used to monitor attorney performance.

REO management and dispositions

Lima One demonstrates effective REO management and sales oversight. Notable aspects include the following:

• Lima One engaged two asset management vendors in 2022 for which assignments are split 50/50.
• The asset management companies are required to provide weekly property status updates.
• Broker price opinions are updated every six months.
• Lima One REO specialists are responsible for managing property preservation and notices of violation for both performing and non-performing loans.
• Weekly calls are led by the REO manager who performs oversight of the asset management companies, but there is no formal scorecard process.
• A profit and loss analysis is completed to determine if rehabilitation properties that have gone to REO will be sold as is or the construction will be completed.
• Properties are reviewed for price reduction every 30 days.
• Lima One completed 63 asset sales during first-half 2023 with a gross sales-to-market-value average of 98%.

REO accounting and reporting

Small-balance commercial assets in Lima One's REO portfolio are typically single or small multi-tenant properties. Historically, Lima One has not had REOs that were tenant occupied, but, should that change, it would utilize its real estate agent or affiliated property management company to manage the properties and collect rents.

Legal department

Lima One has a foreclosure referral network with preferred law firms for each state in which it operates. Foreclosure specialists monitor the milestones for timely completion, but there is no formal scorecard used for attorney oversight.

Financial Position

The financial position is SUFFICIENT.

Related Research

• Lima One Capital LLC Assigned AVERAGE Small Balance Commercial Mortgage Primary And Special Servicer Rankings, Aug. 24, 2023
• Select Servicer List, July 18, 2023
• Servicer Category Descriptions Expanded and Revised, Feb. 28, 2022
• 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