Investors chase yields and investors accept risks. Yield maintenance risk is one of the most critical subjective financial investment risks that commercial real estate investors and lenders are concerned with on an ongoing basis because commercial real estate investment usually requires extended holding periods and most of the investment is in the form of commercial real estate private placement securities offerings which are not generally liquid investments. Yield maintenance risk is the risk the investment will not provide the economic return in future years that is being promised today.
So how do we effectively manage yield maintenance risk?
The most critical factor may be an understanding of the key causal elements we have heretofore taken for granted as being “baked into the deal”.
Yield maintenance risk is one of the three (3) risks that we do not traditionally think of as being controllable risks (technology and asset obsolescence being the other two) that are most closely associated with total investment loss risk or investment loss severity risk.
The key to commercial real estate investment, like all other B2B businesses, is the realization of the fact the Information Age only makes technology risk be felt more acutely and in ever-shorter periods of time. If we think about our economy in the abstract, we see that technology risk is the key risk that drives all other risk elements that make up the subjective financial investment risk pie.
The second key risk is execution risk – the risk the sponsor and management of the enterprise will fail to properly execute the business plan of operations required to produce the cash flows that serve to support yield risk management. Execution risk mitigation is an important tenet of this process and requires the investor or lender have a proactive approach to address this issue. Execution risk becomes more germane when market conditions change and management fails to realize the changes or implement programs and policies that reduce the impact of market changes (again, technology risk being the chief culprit).
The job of INVIZEN is to harness these risks into a management scheme that provides up to 24 months advance notice of a problem or market event (a given technology risk event that is reasonably expected to change the nature of competition in a way that is reasonably-expected to result in a reduction of cash flow from income-producing business assets) so we can do things about it. INVIZEN offers the only end-to-end solution that is designed to address the totality of the genesis of risk in a way that is proactive and more fitting for the 21st century than gut decisions.