Avoiding Investment Loss Train Wrecks

Nobody wants to watch their investment have a train wreck.  Investments in securities in commercial real estate private placement offerings involve risks and the job of the investor is to assess whether or not these risks are likely to become a reality and create the potential for a future loss.  The challenges come from our dynamic market economy that create opportunities for profit while applying creative destruction on what is already in operation.  If we stop and take stock of what typically happens, we find clues and patterns that provide outstanding opportunities for us to insulate our businesses and investments from being part of a future train wreck.  We may do well to consider some of the following points of reference in our quest:

  • Most investment failures (absent fraud) don’t seem to occur in CRE acquisition transactions until well after the first 24 months past closing.  Did you ever wonder why that might be?
  • Most investment failures seem to cite the impact of increasing competition as the main reason why a CRE property operating business doesn’t perform.  Did you ever wonder why that may be?
  • Most investment failures seem to involve a fire sale of the property when the business didn’t perform, yet “the next guy” who takes over seems to be able to make the new opportunity work.  Did you ever wonder why that may be?

When there is a train wreck we have the habit of playing the blame game.  We blame the sponsor, the broker-dealer, the underwriter, the consultants, the lawyers, the accountants and anyone else we can think of in a vain attempt to avoid not having to be accountable for the part of investing that involves risk-taking.  Investors aren’t really interested in investing, what they really see is only profit-taking.

Perhaps we should look at understanding these issues a bit more and then we can all get what we want.  Investment failure train wrecks don’t happen in the month following the close of escrow, the first six months or even the first year unless something criminal has happened in most cases (exception being new construction projects) because the job of the underwriting and due diligence assessment is to identify the issues that could create these train wrecks.  Nobody really thought about this fact until INVIZEN created a program that constantly re-underwrites a given transaction on an ongoing basis, thus re-creating this potential outcome on an ongoing basis.  That changes things, huh?

Fire sales happen when properties experience a bankruptcy or foreclosure.  The market views it as a mess that has risks and costs that have to be endured, so we have to get a discount to make it worth our efforts.  Bankruptcies and foreclosures happen because the sponsor failed to manage their exposure to market risk and abide by their own rules.  Gee, that sounds like something we can address to with proactive monitoring of operations and emerging market trends (i.e.: increased competition) that could create a future bankruptcy or foreclosure.  That would give us time for an orderly exit instead of a fire sale loss outcome.

Just because the train wreck is coming doesn’t mean you have to stay in your seat.

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