The goal of the INVIZEN RTS Investment Protection Program is to provide the means for the investor, developer, sponsor, property operations manager and lender to have a proactive tool for helping them prevent materially-significant investment loss severity risk from becoming a reality over the entire term of their investment holding period. The INVIZEN RTS approach focuses on the following fundamental realities that reasonable people are likely to agree upon:
- Technical default risk is a function of monitoring the key transaction maintenance covenants that could otherwise conspire to create an administrative foreclosure and/or otherwise weaken a security’s secondary-market sales prospects. The INVIZEN model is designed to reduce this exposure to a manageable level through continuous reporting, issue remediation recommendation programming, issue resolution requirements, and/or management change requirements in cases where remediation steps are not completed in accordance with transaction maintenance requirements.
- Maturity default risk (the risk the investment cannot be disposed of at an acceptable price at the end of the investment holding period) is a function of term default risk management. The proper management of term default risk can all but eliminate maturity default risk (the exception being a market disruption event that impacts the capital markets, as by their nature, market disruptions are unpredictable).
- Term default risk revolves around market opportunity, as the continued availability of market opportunity drives revenues, and revenues are the basis for managing term default risk. Matters such as Acts of God, civil insurrection, fire, flood, acts of war and the like are not foreseeable and are risks that the RTS program cannot eliminate.
- Market opportunity is based upon forecasts, but the longer the market forecast window, the greater the chance there will be a deviation in the forecast, or the forecast becomes downright wrong. In reality, the longest market forecast window that is likely to be relevant is that of a forward-looking 24-month period. While it is true that a market disruption can occur at any time, experience tells us that most market disruptions take 24 months or longer to have a telling impact on a given business’ market opportunity.
Accordingly, the RTS approach is to provide a level of safety and/or assurance of outcome that is sustainable over the entire holding period of an investment, based upon a forward-looking 24-month “protection period”. This means the following linchpins have to be present for the RTS approach to work its “magic” and have the potential to continually create the stated outcome opportunity:
- Revenue generation opportunity potential is continually assessed on a monthly basis over the entire term of the investment holding period via a complete RTA feasibility analysis of the property’s subject primary marketing area; then
- The RTA analysis focuses its attention on the next 24-month market forecast window only; then
- The resulting pro forma economics are then restated to provide a combination of current assets and accessible reserves that would provide capital liquidity on a level that would be reasonably expected to carry the business forward for that 24-month forward-looking period in the face of virtually all foreseeable events – subordinating distributions to these requirements and/or requiring capital contributions by the sponsor/investors in order to sustain them when insufficient liquidity is already available to the property (essentially eliminating the risk of a liquidity crisis resulting in a bankruptcy petition from occurring in the forward-looking forecast period); then
- The management of the property is required to use the RTS reporting system to provide management reports and certifications regarding compliance with all transaction maintenance covenants so that the prospect of an administrative default or other key management issue may be reduced to a level where it would no longer be reasonably-considered to be materially-significant over that 24-month forward-looking period.
This rolling approach to monitoring market, finance and operational compliance issues on a continual basis provides the lender, investor, developer, sponsor and property management entities with the assistance they need to help them prevent the transaction’s income-generating assets from becoming impaired to a degree that could be reasonably considered materially-significant.