METRO BUSINESS CENTER – COMPLETE RISK ASSESSMENT

• PROPERTY OVERVIEW:
• Property: Metro Business Center, Dallas TX
• Type: Class B office, 85,000 SF, 4 stories
• Purchase price: $4.2M, Current NOI: $380k
• Built: 1985, renovated 2010, 78% occupied
• Initial cap rate: ____% (380k ÷ 4.2M = 9.05%)
• RISK IDENTIFICATION & SCORING:
• Major Tenant Dependency Risk:
• – Description: 35% income from accounting firm, lease expires 18 months
• – Probability: ___/5 (likelihood of non-renewal)
• – Impact: ___/5 (effect on cash flow)
• – Total Score: _____ (probability × impact)
• – Priority: _____ (High/Medium/Low)
• – Financial Impact: $_____ annual income loss if not renewed
• Below-Market Rents Risk:
• – Description: Current rents 10-15% below market
• – Probability: ___/5
• – Impact: ___/5
• – Total Score: _____
• – Upside Potential: $_____ additional income at market rates
• Rising Operating Expenses Risk:
• – Description: 8% annual expense increases past 3 years
• – Probability: ___/5
• – Impact: ___/5
• – Total Score: _____
• – Projected Impact: $_____ additional expenses annually
• HVAC Replacement Risk:
• – Description: $200k HVAC replacement needed within 2 years
• – Probability: ___/5
• – Impact: ___/5
• – Total Score: _____
• – Capital Required: $200,000
• Electrical System Risk:
• – Description: Original 1985 electrical, some knob-and-tube
• – Probability: ___/5
• – Impact: ___/5
• – Total Score: _____
• – Potential Cost: $_____ for electrical upgrades
• Roof Issues Risk:
• – Description: 15-year membrane roof with ponding
• – Probability: ___/5
• – Impact: ___/5
• – Total Score: _____
• – Replacement Cost: $_____ estimated
• Parking Deficiency Risk:
• – Description: 3.2 spaces/1000 SF vs 4.0 market standard
• – Probability: ___/5
• – Impact: ___/5
• – Total Score: _____
• – Tenant Impact: ________________________________
• ADA Compliance Risk:
• – Description: Pre-ADA building, limited improvements
• – Probability: ___/5
• – Impact: ___/5
• – Total Score: _____
• – Compliance Cost: $_____ estimated
• Market Vacancy Risk:
• – Description: 15% submarket vacancy, trending up
• – Probability: ___/5
• – Impact: ___/5
• – Total Score: _____
• – Rental Impact: ________________________________
• New Competition Risk:
• – Description: 150k SF Class A building opening nearby
• – Probability: ___/5
• – Impact: ___/5
• – Total Score: _____
• – Competitive Response: ________________________________
• Employment Base Risk:
• – Description: Major employer announced 500 layoffs
• – Probability: ___/5
• – Impact: ___/5
• – Total Score: _____
• – Economic Impact: ________________________________
• Transportation Uncertainty:
• – Description: DART rail extension planned but unfunded
• – Probability: ___/5
• – Impact: ___/5
• – Total Score: _____
• – Value Impact: ________________________________
• RISK PRIORITIZATION (Score 15+ = High Priority):
• High Priority Risks:
• 1. ________________________________ (Score: ___)
• 2. ________________________________ (Score: ___)
• 3. ________________________________ (Score: ___)
• Medium Priority Risks:
• 1. ________________________________ (Score: ___)
• 2. ________________________________ (Score: ___)
• 3. ________________________________ (Score: ___)
• Low Priority Risks:
• 1. ________________________________ (Score: ___)
• 2. ________________________________ (Score: ___)
• DUE DILIGENCE PLAN:
• Phase 1 – Document Collection (Days 1-7):
• – 5-year financial statements and rent rolls
• – All leases, especially major tenant lease
• – Operating expense breakdown and trends
• – Capital expenditure history
• – Title commitment and survey
• – Environmental Phase I ESA
• – Property tax assessments and appeals
• Phase 2 – Physical Inspections (Days 8-21):
• – General building inspection: $_____ cost
• – Electrical system evaluation: $_____ cost
• – HVAC assessment by qualified contractor: $_____ cost
• – Roof inspection: $_____ cost
• – ADA compliance audit: $_____ cost
• – Structural engineer review: $_____ cost
• – Environmental testing if Phase I indicates: $_____ cost
• Phase 3 – Financial Analysis (Days 15-28):
• – Tenant estoppel certificates (all tenants)
• – Rent comparability analysis
• – Operating expense benchmarking
• – Capital reserve analysis
• – Market rent study
• – Tenant credit analysis
• Phase 4 – Market Analysis (Days 22-35):
• – Submarket vacancy and absorption trends
• – Competitive property analysis
• – Economic base and employment trends
• – Transportation impact assessment
• – Future development pipeline
• Phase 5 – Legal Review (Days 30-40):
• – Zoning compliance verification
• – Building code compliance review
• – Litigation search
• – Service contract review
• – Insurance policy analysis
• FINANCIAL IMPACT ANALYSIS:
• Major Tenant Loss Scenario:
• – Lost rental income: $_____ annually (35% of current income)
• – Leasing costs for replacement: $_____ (commissions, TI, free rent)
• – Time to re-lease: _____ months estimated
• – Impact on NOI: ____% decrease
• – Impact on property value: $_____ at ___% cap rate
• Capital Expenditure Impact:
• – HVAC replacement: $200,000
• – Electrical upgrades: $_____ estimated
• – Roof replacement: $_____ estimated
• – ADA improvements: $_____ estimated
• – Parking improvements: $_____ estimated
• – Total CapEx needed: $_____ over _____ years
• – Annual reserve required: $_____ per year
• Market Rent Upside Analysis:
• – Current rental income: $_____ annually
• – Market rate potential: $_____ annually
• – Income upside: $_____ (____% increase)
• – Value creation potential: $_____ at current cap rate
• Expense Control Analysis:
• – Current operating expenses: $_____ per SF
• – Market benchmark: $_____ per SF
• – Expense reduction potential: $_____ annually
• – Management efficiency opportunities: ________________________________
• SENSITIVITY ANALYSIS:
• Base Case (Current Performance):
• – NOI: $380,000
• – Cap Rate: 9.05%
• – IRR: ____% (projected 5-year hold)
• Upside Case (Market Rents + Efficiency):
• – Projected NOI: $_____ (with market rents and expense control)
• – IRR: ____% (projected)
• – Value creation: $_____ over 5 years
• Downside Case (Major Tenant Loss + Capital Needs):
• – Projected NOI: $_____ (with 35% vacancy and CapEx)
• – IRR: ____% (projected)
• – Potential loss: $_____ vs purchase price
• MITIGATION STRATEGIES:
• High Priority Risk Mitigation:
• Major Tenant Risk:
• – Early renewal negotiations with incentives
• – Backup leasing plan with broker pre-marketing
• – Diversification strategy for future leasing
• – Purchase price adjustment: $_____ for tenant risk
• Capital Expenditure Risk:
• – Seller contribution: $_____ requested for HVAC
• – Escrow holdback: $_____ for immediate repairs
• – Phased improvement plan to spread costs
• – Energy efficiency upgrades to reduce operating costs
• Market Competition Risk:
• – Property repositioning and improvement plan
• – Competitive amenity additions
• – Service quality improvements
• – Niche market targeting (smaller tenants)
• Physical Building Risk:
• – Comprehensive inspection contingency
• – Professional repair cost estimates
• – Warranty requirements from seller
• – Maintenance contract transitions
• Insurance and Legal Protection:
• – Title insurance with standard exceptions
• – Property insurance with replacement cost coverage
• – Environmental liability insurance
• – Umbrella liability coverage
• CONTRACT TERMS & CONTINGENCIES:
• Purchase Price Adjustments:
• – Base purchase price: $4,200,000
• – HVAC replacement credit: ($200,000)
• – Electrical upgrade allowance: ($_____ )
• – Roof repair credit: ($_____ )
• – Adjusted purchase price: $_____
• Critical Contingencies:
• – Inspection contingency: _____ days
• – Financing contingency: _____ days
• – Environmental contingency: _____ days
• – Major tenant estoppel requirement
• – Satisfactory lease review of top 5 tenants
• Due Diligence Timeline:
• – Due diligence period: _____ days total
• – Hard money deadline: Day _____
• – Inspection deadline: Day _____
• – Financing commitment: Day _____
• – Closing deadline: Day _____
• FINANCING CONSIDERATIONS:
• Lender Risk Assessment:
• – DSCR with current NOI: _____ (lender minimum 1.25x)
• – LTV at purchase price: ____% (lender maximum 75%)
• – Tenant concentration concern: Major tenant = 35%
• – Property condition requirements: ________________________________
• Financing Strategy:
• – Loan amount: $_____ (75% LTV)
• – Down payment required: $_____
• – Reserve requirements: $_____ (6 months PITI)
• – Interest rate assumption: ____% (current market)
• – Loan term: _____ years
• INVESTMENT RECOMMENDATION:
• Go/No-Go Decision: _____ (GO / NO-GO)
• Recommendation Justification:
• The Metro Business Center investment is recommended/not recommended because:
• Positive Factors:
• – Below-market rents provide upside potential
• – ________________________________
• – ________________________________
• – ________________________________
• Negative Factors:
• – High tenant concentration risk
• – ________________________________
• – ________________________________
• – ________________________________
• Maximum Acceptable Purchase Price:
• – Risk-adjusted value: $_____
• – Required return: ____% IRR minimum
• – Price adjustment for risks: $_____ below ask
• – Final acceptable price: $_____
• Required Seller Concessions:
• 1. HVAC replacement credit: $200,000
• 2. ________________________________: $_____
• 3. ________________________________: $_____
• 4. ________________________________: $_____
• Total concessions required: $_____
• Investment Strategy Modifications:
• – Value-add approach focusing on rent increases
• – ________________________________
• – ________________________________
• – ________________________________
• NEXT STEPS:
• Immediate Actions:
• 1. Submit LOI with risk-adjusted pricing
• 2. Begin lender pre-qualification process
• 3. Line up inspection professionals
• 4. ________________________________
• 5. ________________________________
• Due Diligence Priorities:
• 1. Major tenant lease review and renewal discussions
• 2. Comprehensive building systems evaluation
• 3. Market analysis and competitive positioning
• 4. ________________________________
• 5. ________________________________
• LESSONS LEARNED:
• Risk Assessment Insights:
• – Tenant concentration is highest priority risk
• – ________________________________
• – ________________________________
• – ________________________________
• Due Diligence Process Improvements:
• – Start tenant discussions early in DD period
• – ________________________________
• – ________________________________
• – ________________________________
• Future Investment Criteria Adjustments:
• – Maximum single tenant concentration: ____%
• – ________________________________
• – ________________________________
• – ________________________________