Internal Risk Assessment Model
The Internal Risk Assessment Model is an internally used model to assess the investment risks associated with specific real estate or real estate-based projects. Internal, meaning the risk is calculated internally and for subjective use of clients.
The model is not generated, endorsed, assessed or otherwise associated by credit assessment third parties such as consultancy firms or independent credit assessment firms as is industry standard when dealing with institutional clients and large funds.
Please note: risk assessment is not an exact science, any and all models assessing risk are subjective in nature and assume vacuum-based scenarios. "Black Swans" or events that are only imaginable in hindsight are a de facto, one should always assume any property can lose the entirety of its investment, if not be liable to additional capital input.
This risk assessment model is used primarily for 3 functions:
Assisting clients with further understanding of risk/reward ratio
There's a direct correlation between risk & potential return of an investment, the riskier the endeavor the more likely it is to produce a higher return, clients also expect a higher return when they have higher chance of losing the investment ("Risk Premium") however both outliers occur due to specific circumstances and projects with equivalent risk levels can have different returns ("Outperformance").
Assisting Local Developers/Project Operators & RBIPs with Portfolio Structuring
Portfolio SPVs or SPVs holding multiple properties / separate investments, should always be segregated by Risk. Otherwise it creates a scenario similar in nature to the Synthetic CDO that caused the 2008 financial crisis by packaging together high-risk and low-risk assets. (the failure of high-risk drags low-risk assets with them). Segregation by asset class & risk allows diversification into various 'plays' whilst retaining bankruptcy-remoteness of each project.
Assisting Investment Strategists of Individual Properties
Each Fund & REIT and other cumulative investment vehicle maintains strict risk parameters of the type of 'plays' it should invest in, the assessment of risk is the final decider whether that 'play' can be used by the fund / REIT.
The Assessment occurs within the Real Estate Investment Calculator, by completing all the financial projections of the investment first, and then completing the human required inputs.
The assessment consists of providing various scores to factors in a few key segments: Local Developer/Project Operator general wellbeing, national wellbeing, Project Qualitative Risk Analysis; Project Quantitative Risk Analysis. also slightly adjusting the scale due to the burden of additional and key risk assessments that factor in.
The first part provides an overall overview of the type of risks considered and their points received.
The second part provides the company set thresholds for the allowed losses accumulated on a specific property / project, and the instruments permitted to use in each case scenario.
The third part is a detailed orientation of the model's each factor, point system that is used to evaluate the risk and the reasoning behind the scores evaluated.
Risk Assessment Model
| Risk Level Assessment | Int. Rating | Buy2 Range | Build2/Fix2 Range |
|---|---|---|---|
| Very Low Risk | AAA+ | 1,536.35 - 1,600.00 | 1,704.84 - 1,775.00 |
| AAA | 1,472.71 - 1,536.35 | 1,634.69 - 1,704.84 | |
| AAA- | 1,409.06 - 1,472.71 | 1,564.53 - 1,634.69 | |
| AA+ | 1,345.42 - 1,409.06 | 1,494.38 - 1,564.53 | |
| AA | 1,281.77 - 1,345.42 | 1,424.22 - 1,494.38 | |
| Low Risk | AA- | 1,218.13 - 1,281.77 | 1,354.07 - 1,424.22 |
| A+ | 1,154.48 - 1,218.13 | 1,283.91 - 1,354.07 | |
| A | 1,090.83 - 1,154.48 | 1,213.76 - 1,283.91 | |
| A | 1,027.19 - 1,090.83 | 1,143.60 - 1,213.76 | |
| BBB+ | 963.54 - 1,027.19 | 1,073.44 - 1,143.60 | |
| Moderate Risk | BBB | 899.90 - 963.54 | 1,003.29 - 1,073.44 |
| BBB- | 836.25 - 899.90 | 933.13 - 1,003.29 | |
| BB+ | 772.60 - 836.25 | 862.98 - 933.13 | |
| BB | 708.96 - 772.60 | 792.82 - 862.98 | |
| BB- | 645.31 - 708.96 | 722.67 - 792.82 | |
| B+ | 581.67 - 645.31 | 652.51 - 722.67 | |
| High Risk | B | 518.02 - 581.67 | 582.35 - 652.51 |
| B- | 454.38 - 518.02 | 512.20 - 582.35 | |
| CCC+ | 390.73 - 454.38 | 442.04 - 512.20 | |
| CCC | 327.08 - 390.73 | 371.89 - 442.04 | |
| CCC- | 263.44 - 327.08 | 301.73 - 371.89 | |
| Very High Risk | CC+ | 199.79 - 263.44 | 231.58 - 301.73 |
| CC | 136.15 - 199.79 | 161.42 - 231.58 | |
| CC- | 72.50 - 136.15 | 91.27 - 161.42 | |
| C+ | 8.85 - 72.50 | 21.11 - 91.27 | |
| C | >0 - 8.85 | >0 - 21.11 |
General Local Developer/Project Operator Wellbeing
| Source | Name | Condition(s) | High. Mark (Value) | Low. Mark (Value) |
|---|---|---|---|---|
| Internal Records | Operations Management of Similar Projects | 5 | 25 pts. (10 years<) | 0 pts. (>1 year) |
| Internal Records | Company Designated Reserves | 5 | 25 pts. (*1) | 0 pts. (*2) |
| Opinion Based | Organizational Capability | 3 | 25 pts. (Above Avg.) | 8.34 pts. (Below Avg.) |
| Internal Records. | Credit History | 3 | 0 pts. (*3) | -25 pts. (*4) |
| Internal Records. | Repayment Delay History | 5 | 0 pts. (<30 days) | -25 (Default) |
*1 ">12 months of current interests & principle liabilities (senior secured debt)"
*2 "<3 months of current interests & principle liabilities (senior secured debt)"
*3 "No Previous Problems"
*4 "Significant Performance Failures"
National Well-being
| Source | Name | Condition(s) | High. Mark (Value) | Low. Mark (Value) |
|---|---|---|---|---|
| KYC Limited (World Risk Map) | Know our Country World Risk Map | 11 | 25 pts. (90-100) | 0 pts. (0-9) |
| World Bank | (WGI) Voice and Accountability | 26 | 25 pts. (100) | 0 pts. (0-3) |
| World Bank | (WGI) Political Stability and Absence of Violence | 26 | 25 pts. (100) | 0 pts. (0-3) |
| World Bank | (WGI) Government Effectiveness | 26 | 25 pts. (100) | 0 pts. (0-3) |
| World Bank | (WGI) Regulatory Quality | 26 | 25 pts. (100) | 0 pts. (0-3) |
| World Bank | (WGI) Rule of Law | 26 | 25 pts. (100) | 0 pts. (0-3) |
| World Bank | (WGI) Control of Corruption | 26 | 25 pts. (100) | 0 pts. (0-3) |
| DoingBusiness (World Bank) | Strength of Legal Rights | 12 | 25 pts. (12) | 2.12 pts. (1) |
| DoingBusiness (World Bank) | Resolving Insolvency | 26 | 25 pts. (100) | 0 pts. (0-3) |
| DoingBusiness (World Bank) | Enforcing Contracts | 26 | 25 pts. (100) | 0 pts. (0-3) |
| DoingBusiness (World Bank) | Overall DB Score | 26 | 25 pts. (100) | 0 pts. (0-3) |
| Third-Party Data | Economic Growth Period | 4 | 25 pts. (Expansion) | 6.25 pts (Trough) |
| Third-Party Data | Population Pyramid | 4 | 25 pts. (Expansion) | 6.25 pts. (Trough) |
| Third-Party Data | Government Subsidies (2Rent) | 5 | 25 pts. (Rent Subsidies) | -25 pts. (No Rent Change) |
| Third-Party Data | EGR Survivabilitiy | 7 | 25 pts. (>10%) | 0 pts. (<0%) |
Scoring Methodology
World Bank WGI & Doing Business indicators: 0-25 point scale with 4-point ranges reflects standard international methodology for governance and business climate assessment.KYC World Risk Map: 10-point ranges (90-100, 80-89, etc.) provide granular country risk evaluation.Strength of Legal Rights: 12-point index with proportional scoring (25 to 2.12 points) measures creditor protection effectiveness.Economic Growth Period & Population Pyramid: 4-stage business cycle scoring (25, 18.75, 12.5, 6.25 points) evaluates macroeconomic conditions and demographic trends for investment timing.
Project Quantitative Risk Analysis
| Source | Name | Condition(s) | High. Mark (Value) | Low. Mark (Value) |
|---|---|---|---|---|
| Project Records | Skin-in-the-game (Equity Retained by Company) | 6 | 25 pts. (≥75%) | 0 pts. (≤5%) |
| Project Records | Skin-in-the-game (Profit Generated) | 5 | 25 pts (*1) | 0 pts. (*2) |
| Project Records | Project Owner / Property Management | 3 | 25 pts (*3) | 0 pts. (*4) |
| Financial Projections | Market Evaluation (purchase, % under Market Value) | 5 | 25 pts. (≥ -50%) | 0 pts. (≥ +25%) |
| Project Planning | Dividend & Private Lender Repayment Frequency | 6 | 25 pts (End of Project) | 5 pts. (Weekly) |
| Project Planning | Marketing Level *5 | 3 | 25 pts. (Level 1) | 8.34 pts. (Level 3) |
| Project Planning | Management Level *6 | 3 | 25 pts. (Level 1) | 8.34 pts. (Level 3) |
| Sales Information | Current Occupancy | 6 | 25 pts. (100%) | 0 pts. (0%) |
| Sales Information | Individual Units | 6 | 25 pts. (>6 units) | 0 pts. (1 unit) |
| Financial Projections | Loan-to-Cost (LTC) % | 7 | 25 pts. (<50%) | 0 pts. (≥80%) |
| Financial Projections | Financial Leverage, % | 6 | 25 pts. (<50%) | 0 pts. (≥90%) |
| Financial Projections | Private Project Funding | 3 | 25 pts. (Equity) | 0 pts. Fixed-Income |
| Project Due Diligence | Location | 6 | 25 pts. (Developed) | 0 pts. (desolate) |
| Financial Projections | Average Expense Growth Ratio ("EGR") Projected | 7 | 25 pts. (>10% /year) | 0 pts. (<0%/year) |
| Project Due Diligence | Infrastructure | 6 | 25 pts. (Developed) | 0 pts. (Desolate) |
| Financial Projections | Operating Expense Ratio | 16 | 25 pts. (>20%) | 3.125 (>150%) |
| Financial Projections | Debt Service Coverage Ratio (DSCR) | 6 | 25 pts. (>2.0) | 0 pts. (<1.0) |
Scoring Methodology
Skin-in-the-game (Equity & Profit): Higher equity retention and profit generation demonstrate stronger company commitment and financial performance.Current Occupancy: Direct percentage-based scoring reflects property utilization efficiency and market demand.Financial Leverage: Lower leverage ratios indicate reduced financial risk and greater stability.Location & Infrastructure: Development level scoring evaluates geographic and infrastructural advantages for project success.
*1 "<1% of Assests Under Management ("AUM") per annum generated on average as profit."
*2 ">5% of Assests Under Management ("AUM") per annum generated on average as profit."
*3 "Full Project Owner and Full Internal Management of Property."
*4 ">Management of Investment with Third-Party Project Manager."
*5 Company sees that real estate project marketing can be split into 3 levels, (1) low-budget marketing by means of utilizing free internet MLS services, placing property with a real estate agent, etc. (2) Mid-Budget marketing by paying for advertising in relation to property sales & tenant acquisition. (3) High-Budget Marketing that requires a sales department and employee(s) to manage sales (predominantly large developments).
*6 Company sees that real estate property management can be split into 3 levels, (1) Occasional Maintenance (2) Constant Maintenance by an employee, (3) Full Maintenance Team on site.
| Source | Name | Condition(s) | High. Mark (Value) | Low. Mark (Value) |
|---|---|---|---|---|
| Financial Projections | Cap Rate vs Forward Cap Rate (Change %) Projected | 6 | 25 pts. (> -25%) | 0 pts. (>30%) |
| Financial Projections | Loan-to-Value (LTV) % | 7 | 25 pts. (<50%) | 0 pts. (≥80%) |
| Sales Information | Government Mandates & Subsidies | 5 | 25 pts. (Rent Subsidies) | -25 pts. (*1) |
*1 "Encumbrance on any rent increase for the duration of projected investment period."
Project Qualitative Risk Analysis
| Example: Qualitative Opinion Based 5x5 Matrix | ||||||
|---|---|---|---|---|---|---|
| 5 | Very High | 5 | 4 | 3 | 2 | 1 |
| 4 | High | 10 | 6 | 8 | 4 | 2 |
| 3 | Moderate | 15 | 12 | 9 | 8 | 3 |
| 2 | Low | 20 | 16 | 12 | 6 | 4 |
| 1 | Very Low | 25 | 20 | 15 | 10 | 5 |
| Very Low 1 | Low 2 | Moderate 3 | High 4 | Very High 5 | ||
Market Dynamics Risk
| Source | Name | Condition(s) | High. Mark (Value) | Low. Mark (Value) |
|---|---|---|---|---|
| Opinion Based | In Event of Market Saturation & Oversupply | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Standard Market Demand Fluctuations | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Strong Economic Crisis (Decline in Spending) | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Real Estate Market Crisis (Market Value Asset Collapse) | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Consumer Preference Change (Significant Shift) | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
Property Risk
| Source | Name | Condition(s) | High. Mark (Value) | Low. Mark (Value) |
|---|---|---|---|---|
| Opinion Based | Major Physical Issues with the Property | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Structural Failure of the Property | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Issues with Title and Ownership Documents | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Unprojected Capital Expenditure Required | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Poor Maintenance | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
Project Risks
| Source | Name | Condition(s) | High. Mark (Value) | Low. Mark (Value) |
|---|---|---|---|---|
| Opinion Based | Feasibility Failure (Project Quality/Vision not met) | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Significant Cost Overruns | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Acquisition / Construction Period Timeline Delay/Shift | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Shortages & Supply Issues | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Rapid Requirement of Liquidation of Asset | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
Environmental Risks
| Source | Name | Condition(s) | High. Mark (Value) | Low. Mark (Value) |
|---|---|---|---|---|
| Opinion Based | Natural Disasters | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Man-Made Disasters | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Climate Change Considerations (Known Changes) | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Vandalism and other Damages | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Unexpected Waste Production Issues (Commercial RE) | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
Financial & Legal Risks
| Source | Name | Condition(s) | High. Mark (Value) | Low. Mark (Value) |
|---|---|---|---|---|
| Opinion Based | Liability Lawsuits | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Eminent Domain | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Property Theft/Extortion | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Income & Capital Gains Tax Increases | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Opinion Based | Changes in Interest Rates | 25 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
After conducting the qualitative risk evaluation in all five aspects (1) Market Dynamics Risks, (2) Property Risks, (3) Project Risks, (4) Environmental Risks, (5) Financial & Legal Risk. Severity Points (1 – 5) and Probability Points (1 – 5) will be aggregated, shall the qualitative analysis show that severity/impact is a greater, project will be considered more prone to low-probability high-impact "Black Swan" events therefore with incentive to shorten the term of the projected investment period. Whilst in the event Probability/Frequency is greater, project will be considered to consistent but mild impacts and therefore with an increased focus on retaining additional contingency & vacancy reserves from any incoming cash flows, evaluating the projections for their stability to sustain occasional exposures without damaging the overall positive results of the project.
| Source | Name | Condition(s) | High. Mark (Value) | Low. Mark (Value) |
|---|---|---|---|---|
| Financial Projections | (Short-Term) Projected Investment Period | 26 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Financial Projections | (Long-Term) Projected & Budgeted (Vacancy + Cash Reserve %) /year | 26 | 25 pts. (5x5 Matrix) | 1 pts. (5x5 Matrix) |
| Project Planning | Years in Business | 26 | 25 pts. (1 year) | 0 pts. (>25 years) |
| Project Planning | Percent Difference Between Purchase Price & Prop Value | 5 | 25 pts. (>= -50%) | 0 pts. (>=25%) |
| Project Planning | Process I | 3 | 25 pts. (Buy2) | 8.34 pts. (Build2) |
| Project Planning | Proposed | Criteria | 3 | 25 pts. (Proposed) | 0 pts. (Other) |
Buy2 & Build2 additional quantitative risk assessment
| Source | Name | Condition(s) | High. Mark (Value) | Low. Mark (Value) |
|---|---|---|---|---|
| DoingBusiness (World Bank) | Dealing with Construction Permits Score | 26 | 25 pts. (100) | 0 pts. (0-3) |
| Sales Information | Current Development Phase at Investment Entry | 4 | 25 pts. (Ground-Up) | 6.25 pts (*1) |
| Sales Information | Current Presales % at Investment Entry | 5 | 25 pts. (> 80%) | 5 pts. (≤20%) |
| Project Planning | Contractors (Share of First Choice and Second Options) | 5 | 25 pts. (Internal) | 0 pts. (0/100) |
| Project Planning | Contractors (Previous Collaboration Experience) | 4 | 25 pts. (*2) | 0 pts. (None) |
| Financial Projections | Expected net sales revenue to external capital % | 5 | 25 pts. ( 140%<) | 0 pts. (≥ 110%) |
| Project Planning | Government Mandates & Subsidies | 4 | 25 pts. (*3) | 0 pts. (None) |
Reasoning: the more years a specific local developer/project operator and its team have run operations on similar properties or 'plays', the more aware the team is of the hidden costs and therefore may project more accurate financial forecasts, and are more aware of hidden liabilities and challenges and the options to deal with those challenges.
Loss Exposure & Stop Loss Management
The Company maintains a strict loss exposure & stop loss management policy, whereby loss exposure is calculated independently to each investment in any given portfolio. The company monitors KPI's on a monthly to quarterly basis, and has constructed a system of thresholds.
Thresholds:
(i) Project Normal Operations;
a(ii) Investment Return Failure, but projected cash flows are above liabilities
(iii) 'acceptable losses' within project designated contingency & reserve budgets;
(iv) 'StopLoss Imitation' outside parameters of acceptable losses, liquidity designated reserves are initiated and property is put for sale at market rate.
(v) 'Debt Liquidation' property could not be sold and is continuing to operate at a total loss, listed at above LTV ratio + any secured debt. (The company assumes it has access to 50,000.00 USD of private loans at money market rate +3%) and any warchest funds which can be used for to sustain additional restructuring;
(vi) distressed restructuring.
Decision-Making Protocols
Turnarounds: in the event that projected cash flow begins to exceed projected liabilities, the executive team can begin a turnaround to a previous threshold in the event that it's currently in threshold (I, ii, iii), only if the projected cashflow exceeds liabilities and can return the designated liquidity reserves within 6 months can it return from threshold iv. If the projected cashflow exceeds liabilities and can return designated liquidity reserves + private money loan and interest (money market +3%) within 3 months a property can be moved from Debt liquidation threshold (v). Distressed Restructuring (vi) cannot be turned around.
Cost-Cutting Measures: the company may implement cost cutting measures to ensure the project does not fall into a lower threshold.
Deferred Maintenance: general maintenance can be deferred by no longer than 6 months.
Projected Renovations Savings designated for projected renovations can be deferred by no longer than 12 months
Marketing & Ancillary Costs: can be deferred by no longer than 24 months
SPV, Legal Administrative Costs: can be deferred indefinitely unless the project is the sole project in SPV.
Tax designated savings: cannot be deferred
mortgages interest savings: cannot be deferred
Insurance & Utilities: cannot be deferred
Non-Projected Liabilities: Non-Projected Liability claims which are not covered by insurance. are the main point, in the event that expenses occur a reassessment of the properties investment potential is triggered, in the event that the project can onboard the additional interest payments as part of its operating expenses and increased capital input leaving it in a better position than in the event of a debt liquidation threshold, the company will continue to operate the property to ensure that in the long-term the company losses less (even if the overall project becomes unviable).
The Company always runs stress-tests on its financial simulations of up to 15% additional capital plus money market rate + 3%.