The 5 Key Lease-Risk Factors that will Fuel Your Actionable, Data-Driven Budgeting and Forecasting Approach
How to create your 2020-proof risk assessment methodology:
1. Select Your Focus Risk FactorsReview your existing risk factors and ask yourself: are they still relevant? How often do I go back to them – is it frequent enough? What risk factors am I missing? Next, decide on a set of risk factors, data sources and frequency. Here is a list of 5 often-overlooked lease-risk factors that you should strongly consider adding to your list:
Work from Home
The shift to working from home is one of the risks that has gotten a lot of attention due to the pandemic, and rightly so. While Google’s announcement that it will extend WFH has caused much concern, the truth is that WFH risk will be very closely related to your tenant’s industry. When calculating this important risk, keep in mind that most companies will have a hybrid WFH-office model, and ask yourself how dependent is your tenant on an office. For example, tech companies – which tend to be global and more used to working remotely – will get a higher WFH risk score than law firms.
What makes your tenant’s company headcount interesting isn’t the number- that is only relevant for calculating space. What is interesting and something to pay attention to are the fluctuations in headcount as that can be a strong indicator of your tenant’s financial health and growth trajectory, or vice versa. We recommend the use of resources like LinkedIn and Glassdoor to track headcount changes in order to stay informed regarding recruitment, hiring freezes, layoffs and furloughs.
When acquiring new tenants for a building, it’s advisable to diversify the industry mix and focus on lower risk industries. Monitoring and measuring the risk factor for existing and new tenants is two-fold: First, follow press related to the specific industry they are in and assign each tenant a risk score. After gaining a deeper understanding of your building’s existing industry risk makeup, make sure to diversify and maintain a healthy industry mix of low, medium and high-risk industries. Since industry risk may fluctuate in uncertain times, we recommend periodically evaluating and updating your industry mix risk score.
When assigning and calculating rent risk, it’s important to not only be aware of the market rent, but also understand how it corresponds with your tenant’s financial wellbeing. Rent burden is assessed by calculating the percentage of rent from your tenant’s profits (which you can research independently). If the rent represents more than 5% of your client’s profits, see this as a red flag, and take this risk factor to heart – as it’s very likely to affect your risk of the tenant asking for rent relief, terminating or not renewing the contract.
Your tenant’s financial status, including their expenses, revenue and profitability, are an integral part of a due diligence process. Even more important than their financial standing at any given time, is your client’s financial stability. Tracking their stability across media mentions and market intelligence platforms (like S&P, or in the software industry – Pitchbook) is essential to understanding how your tenants’ finances are trending and how much risk they might represent for you.