Maturity Risk, Term Risk & Default Risk in CRE Investments

People talk about these terms all the time and few have the time to actually learn what they mean, so take a look.

Default Risk

The risk an action or failure of action by management will lead to a default event that is part of the covenants of a securities issuance.  A nice way of saying you were supposed to do this or that so now we have to foreclose on your property because you are not acting in our best interest.  This is the chief form of default risk – technical things that can go wrong.  Obviously you can default on other contracts or things too, but these are not as big an issue as you might think when it comes to CRE properties.

Maturity Risk

The risk the asset will not be worth enough the day you sell it to someone else to pay back your investment.  Maturity risk can only be said to really be pertinent if term risk is significant, so as long as term risk is under control, the exposure to maturity risk would be considered slight.

Term Risk

The risk the business investment will not generate enough earnings over time to allow you to be paid back your investment by those earnings, by a future refinance or future sale event.  As long as your business has a legitimate market opportunity to capture revenue as efficiently as the rest of the market, you have a basis for managing term risk.  When you cannot get revenues in the door, you create more term risk and more maturity risk exposure as a result.

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