Shedding light on opaque financials

By Narendra Srivatsa July 1, 2015

As a director for Verisk Commercial Real Estate, I hear many stories — some successful, some not-so-successful. In the commercial real estate industry, our clients and customers run into numerous potential risks, and knowing those risks up front when making an investment is paramount. Here’s one such example.

A commercial real estate developer I know owned several retail locations in a central Connecticut town. He was looking for a midsize strip mall in another part of the state to help round out his portfolio in terms of location and type of commercial property. He did as much research as he could and, relying on a trusted real estate agent, identified a strip shopping center. The property appeared structurally sound, was in a high-traffic location, and had eight tenants that seemed to be thriving. The developer reviewed the seller’s financials and teamed with a partner and lender. He was sure “this is the one” — so he closed the deal.

The property looked good, and it had passed muster with all the parties involved. But what did they really know about the tenants? Unfortunately, they found out quickly: One tenant went out of business; a second moved out because they needed a larger space; and another tenant displayed signs of stress, such as ordering less inventory and placing less merchandise on the shelves. Now the developer faced two vacancies and the likelihood of a third but still had the same loan payment due every month. His partner was not pleased, and the lender didn’t relish the idea of holding a foreclosure fire sale.

In retrospect, it’s obvious the developer needed more information about the tenants before closing the deal. Rents are key to both generating income from the asset and increasing capital growth. But until recently, most privately held companies had opaque financials that couldn’t be easily ascertained. Verisk Commercial Real Estate’s Property Screening Report now provides insight into the finances associated with each tenant within a commercial building. Armed with that information, investors and lenders are better positioned to know the opportunities and potential pitfalls of a commercial property.

The report provides information about the financial health of each tenant. Drawn from several Verisk business areas, the report covers the gamut of key factors:

  • corporate overview of the business, its ownership, estimated annual sales, and business history
  • financial history, such as past bankruptcy filings, tax liens, and court judgments
  • growth clues developed from employee additions, buying more goods, and so forth that could indicate improving financial conditions, more dependable tenants, or one that may need additional space
  • risk behavior scorecard, which includes a detailed business health rating, credit scores, payment trends, delinquencies, buying behavior, and benchmarks against other companies

In addition, the Property Screening Report includes a thumbnail sketch of the property’s attractiveness that can assist in marketing and targeting appropriate tenants. That information includes the property’s proximity to transportation, attractions, fire department, police, and hospitals. The report also covers potential losses from catastrophic hazards, predictive crime analytics scores and benchmarks to national averages on nine different crimes, and maps and aerial photos of the site.

In an increasingly competitive market, owners and lenders need to shed light on uncertainty if they’re to protect their investment. For more information on this low-cost tool to assist you in your next commercial real estate transaction, go to www.verisk.com/cre, or e-mail cre@verisk.com.


Narendra Srivatsa

Narendra Srivatsa is the assistant vice president of product development for Verisk Commercial Real Estate.