Assessing Risk in Commercial Real Estate Transactions

Posted on November 15, 2017

Because large commercial real estate deals can be inherently risky, it is critical that both buyers and sellers engage in often arduous due diligence processes.  These efforts can help both parties to minimize potentially significant liabilities by allowing participants to assess the financial, tax and legal implications required to make informed decisions before moving forward with a transaction.

For those reasons, it is critical for buyers and sellers to engage the expertise of real estate brokers, lawyers, land surveyors, soil scientists and environmental hazard inspectors and other professionals experienced with collecting relevant information that can protect individuals entering into commercial transactions.

Following are five categories to consider when assessing a commercial real estate deal:

• Economic-risk assessment includes reviewing trends that impact the property viability, such as neighborhood population and demographics, and tenant accessibility and rents.
• Liquidity risks, which change during the life of an investment along with market conditions.
• Legal implications, such as local, state and federal regulations, can increase the complexity of or incentivize a deal. This category also includes environmental risks, which sellers must disclose. However, it is the buyer’s responsibility to verify and uncover potential challenges related to these risks.
• Business-operation risk assessment requires buyers to delve deep into a property’s processes, operating income and expenses to properly set expectations.
• Capitalization-rate risks look beyond a property’s sale price to project the risk of one investment over alternatives, based on such elements as its location, existing lease terms and potential rent increases, If the cap rate is low at the time of purchase, the investment has little or no room to grow.

The professionals with Orion Real Estate Group work with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.