Commercial Real Estate Risk Management

Traditional approaches for measuring risk, such as regression and static cashflow models, are inadequate for analyzing the highly structured, complex assets of commercial real estate. Risk Integrated’s SFS uses a cashflow simulation-based approach to make use of all available asset data, including the deal structure, historical market volatility, forecasts, counterparty credit quality and historical default data, to more accurately gauge commercial real estate risk.

Cashflow Simulation

The benefit of the SFS approach to commercial real estate risk management is that it takes into consideration all the complexities of the asset class. It replaces the inherent limitations of the other main approaches such as scorecards, factor models, or static cashflow modeling.

Lenders can load deal parameters into the SFS to quickly assess a prospective loan, evaluating it with multiple variations in interest rates, covenants and collateral structure. The risk model is sensitive to all gradations in CRE deal-structure, including:

  • Location
  • Sector
  • Tenant quality
  • Current leases
  • Step, market, and upwards-only rent reviews
  • Seniority of principle, interest and costs
  • Profit sharing
  • Planned sales
  • Sweep accounts
  • Sinking funds
  • Refinancing
  • Interest rate derivatives

IPRE and Construction

The SFS can be used to assess the unique credit risks of both income producing real estate and commercial real estate construction. Lenders can track the risk profile over the life of an income producing real estate deal as well as a development project (or combinations thereof). As additional information become available for a development project (construction cost overruns or delayed sales), a lender can update the risk model with this latest data and use the SFS to make more informed decisions regarding the status of the project.

CMBS, Equity Investments, Property Derivatives

With recent additions, the SFS can evaluate many other types of real estate-based assets such as residential housing construction, commercial mortgage-backed securities (CMBS), equity investments, and property derivatives.