Real estate risks can be fatal (losing a transaction that is a critical element of a company’s business strategy) or costly (taking too much time, money, or energy and attention). Without a doubt, every real estate process will be exposed to and influenced by risk, and management must choose how to engage it and mitigate it.

Real estate risk comes in many forms and can touch on every phase of a real estate project. While not intended to be a complete list, some types of real estate risk may include:

• Strategic Risk - creating a real estate solution that fails to promote your business objectives.
• Transaction Risk – banking on a transaction partner that cannot or will not complete the deal
• Design Risk – designing or accepting space that is inefficient for your operations
• Negotiation Risk - tipping your hand to your adversary or having a bluff called with no alternative move in reserve
• Financial Risk – waiting for your landlord to complete the construction of your premises only to find out that he does not have the financial ability to fund the improvements
• Construction Risk- suffering from delays or obstacles in the completion of your premises
• Credit Risk - turning control of a space over to a tenant or subtenant, who subsequently defaults
• Relocation Risk - allowing your business operations, technology, or client focus to slip during the relocation process
• Competitive Risk – losing your preferred property to someone else without a viable back up solution to go to
• Timing Risk – being forced into a solution (such as when you approach the expiration of a lease) after failing to provide adequate time to plan for and execute an optimal solution
• Economic Risk – standing still while changes in market pricing, interest rates, or other economic factors affect your interests
• Government Risk - tying-up resources in a property that may require rezoning, special approvals, or other time-consuming issues, and being unable to achieve those approvals or resolve those issues in a timely manner
• Third -Party Risk – being overly dependent on the actions of third-parties that can derail or impede your project
• Internal Risk – allowing internal politics or approval processes to jeopardize the timing or completion of your project

Dealing with risk is defined by the approach that a company takes to run a real estate process from day one. Some companies adopt a reactive approach, while others take a proactive, strategic approach to creating and executing a solution designed to control and mitigate risk. Following is a hypothetical example (in the context of a company acquiring space through a lease) that seeks to highlight the differences between the risk-intensive reactive approach and a more orderly, strategic approach:

Contrary to popular belief, real estate negotiations have only a little to do with boardroom bravado and everything to do with a) setting targets based on defined business objectives, b) understanding what your adversary needs, c) being knowledgeable as to all of the business terms that can potentially be negotiated, and d) bringing leverage to negotiations by ensuring that a suitable alternative (back-up) solutions are available.

A traditional, reactive real estate process typically takes a linear approach to looking at buildings, expressing interest, negotiating terms, and determining how to fit into a particular building or property. Exposure to the negative effects of Negotiation Risk is high in this situation because:

• Any time a company’s mindset is on how one can fit into a building, the focus of negotiations shifts away from promoting the company’s business objectives (i.e. design efficiency, secure technology, expansion rights, flexibility for contraction, financial structure, and more). In this type of reactive approach, the focus shifts to simplistic considerations of square footage, construction costs, and rental rates needed to “make the deal”. Such an approach more often erodes the opportunity for the company to achieve its business objectives and reduces the exercise to simply acquiring space. (Conversely, a strategic approach to real estate mitigates risk by conceptualizing a real estate solution that can optimally promote the business objectives of an organization and, then, by identifying and negotiating toward opportunities in the real estate market that come closest to the optimal solution).
  
• Any time that potential solutions are addressed individually or sequentially, competitive market forces can not be used to one’s advantage in the negotiation of real estate transactions.
  
• Any time “buildings” are pursued, rather than “solutions”, material omissions result from not considering the opponent’s motivations. (Conversely, a strategic approach will appreciate that different opponents have different motivations for wanting to complete a transaction and allow you to gain from them accordingly.).

Business is both the pursuit of opportunity and rewards and the navigation of risk in all shapes and sizes. Real estate is not immune from the challenges of any other business endeavor. Too many tenants and buyers of real estate regard real estate as a commodity. They often incorrectly assume that real estate can be picked off the shelf because “market forces” can be relied upon to keep landlords and sellers of real estate in check. However, unlike a can of soup, mass “market forces” do not decide the type of space that will work best for your company, nor can they predict who will compete against you to acquire property or who will be motivated to compete for your tenancy at any given time. Furthermore, mass market forces have no insight into your opposition’s preferences and their motivations, and they do not know where your business is headed and how it expects to get there. Only you and your advisors do, and if you apply that knowledge to define an optimal solution and then execute it through a process designed to achieve that solution and mitigate risk, you are certain to turn in an impressive scorecard.

Real Estate Strategies Corporation, located in Kenilworth, New Jersey, and serving clients throughout the country, helps companies create and execute Business DRIVEN Real Estate Solutions...and Opportunities, faster and with less risk. Visit www.realstrat.com.

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