All investments incur risk to some degree, and commercial real estate investment and ownership is no different. However, savvy real estate investors and owners tend to eliminate some of that risk and mitigate the rest in order to qualify the remaining risk as acceptable. Wondering how they do that? Let’s begin by reviewing major risk items and quantifying the items of each.
1. Market Risk
In the market, risk revolves around:
- Understanding demographic trends such as population growth trends and rates, aging profiles and specific target markets.
- Economic base trends including employer trends, industry trends, pro business or anti-growth political environments.
- Market rental rates, vacancy, absorption, supply and shadow availability. This includes overall and submarket analysis as well as forecasts.
These critical factors can be analyzed by your real estate professional using the high tech tools at his disposal. There is an extreme amount of current and relevant data available to the agent that he should in turn be making available to his clients. Your investment or ownership requirements can be compared to the real life data he can quickly assemble. This analysis can eliminate almost all of the risk involved within the market analysis.
2. Property Due Diligence
Here risk is based on:
- Title search, tax records, liens, as-built drawings, previous Alta surveys, equipment remaining life, confirmed property size, environmental reports and conditions, ADA features.
- Tenant and lease inventory. Credit checks, remaining tease terms, lease rates, tenant loyalty and tenant mix.
- Management and contracts. Market competitiveness of vendors.
The purpose of due diligence is to quantify the risks involved with a property. Property due diligence will definitely change your view of the asset, for better or for worse. This directly results in a stronger grasp on risk. Price adjustments can parallel risk assessments. In addition, savvy investors can shift risk through proper negotiations before or during the due diligence period.
3. People Involved
The risk associated with the people involved is evident. Who are they? What is their track record? Who is signing off on the transaction and with whom are you negotiating? Who is the title company and who will be handling escrow? Who is issuing personal guarantees? Teaming with a professional commercial real estate agent is a prudent way to ensure that these and all other questions will be answered promptly and completely. The right agent will work to secure you the best commercial real estate transaction while minimizing risk.
4. Contract Risks
Who is guiding your use of contracts? LOIs, PSAs leases, subleases, rights of First Offer, Rights of First Refusal, all of these issues will likely be in play during the transaction. If you are unable to decipher contracts thoroughly yourself, hire someone who can.
It’s impossible to completely eliminate risk in every scenario. But the input of your experienced real estate professional will greatly assist and streamline your risk assessment, allowing you to assign a targeted risk factor on your targeted purchase or lease. Contact Miller Industrial Properties and let us detail our steps for reducing risk on your next commercial property transaction.