Failing net rent is when the tenant fails in their responsibility to pay the net leases. Net rent refers to the agreed amount of money a tenant would pay in a net lease at the start of the period. This means that they would pay the leaser the set upon the value and have to cater for any outgoings such as water bills, maintenance and repairs, and real estate taxes. One of the advantages of this type of lease is that the tenant is responsible for the outgoings, therefore, the net lease goes towards the property owner. Therefore, when a renter does not execute his or her responsibility of paying rent, then failing net rent arises.
The unexpected repair costs are defined as reasonably desirable and necessary expenses resulting from periodic replacement, wear, and tear damage, or vandalism of any part of the facility property but should not include operating costs. Landlords are supposed to maintain their rentals conducive to their renters. They should be prepared for that unavoidable call from a tenant who their air condition broke or electrical repairs are urgently needed. Unanticipated repairs should be handled right away to safeguard the right of the renters to a habitable environment and to protect the property from further damage.
An increase in the rate of capitalization signifies relatively lower prospects of return on property and an increased risk level. The capitalization rate is applied to indicate the anticipated rate of return on an investment property. Mainly, it refers to the ratio of net operating income against the value of the property asset. Using capitalization rates enables an individual to compare the risk of a single market to one another.
A lower-than-expected income growth reduces the value of the organization’s net income from one trading period to another. That means that a low growth income could be risky to the property management firms. Income growth is a significant indicator of productivity and the gross domestic product in a given nation. Lower than expected income growth could be caused by low wages that decrease the consumer spending, unemployment and low levels of education and skills.
Causes of the Risks
One of the causes of the increase in capitalization rate is the rise in interest rates that reflects the costs of borrowing and means that returns should go up to keep the same levels of profitability. In addition, if the market is flooded with too much supply, it would be expected for the rental rates to fall in response, increasing the risks associated with a property. Moreover, when the general outlook of the economy is poor, the capitalization rates tend to grow. Specifically, certain data points, such as wage and job growth, inflation, and unemployment are strong indicators of deteriorating economic conditions.
Additionally, in property management, low-income growth is caused by various factors like a suburb’s track record. For instance, premises with high crime and unemployment rates are typically cheaper than those in metropolitans. Other root causes include the size and facilities found in the belongings, demographics, populations, and public transport proximity. Furthermore, the sources of unanticipated repair expenses are poor building designs, defective construction, improper coordination of incorporated building services, and deferred maintenance. On the other hand, when tenants’ work hours are cut, losing jobs could result in a failed net lease.
Traditional Approaches to Risk Management (TRM)
Traditional risk management is a practice that is mainly concerned with loss exposures yielded by hazard risk. This method excludes from its remit each direction associated with the organization threat but instead focuses on addressing health and safety, managing financial recovery, and accessing insurance (Ogutu, et al., 2018). Many companies have found it misleading since it lacks practical insights concerning dangers’ true and evolving nature. TRM only focuses on risks that could be insured, for instance, when flood damages part of a working environment. In addition, it is a fragmented approach in which every branch manages uncertainties separately with no consultation outside of their respective business units. Lastly, it is a sporadic and reactive control that occurs only after an accident to prevent future reoccurrences.
Alternative Approaches to Risk Management
The alternative approach to risk management is enterprise risk management (ERM) that accounts for insurable risks and other perils a business encounters that no finances could remedy. This practice is consistent and proactive, and it strives to predict potential occurrences before they occur while considering effects and probability. ERM is a holistic and integrated method that coordinates hazard control throughout the organization. Moreover, the ERM method follows modern standards which complement technological and software skills needed to extend crisis management beyond an adherence-driven exercise. In addition, a hazard is ingrained as a culture and embedded as a valuable tool in decision-making to assure business success.
Due diligence goes hand in hand with hazard control. The former is best served by performing a formal analysis and management procedures and engaging in excellent risk management operations. The main goal is to minimize and address perils before undertaking any cooperation. Finally, due diligence aids property managers in comprehending the deal’s nature, involved risks, and key to informed investment decisions. The upsides and downsides of risks should be considered to identify which poses an opportunity for expansion and development.
Ogutu, J., Bennett, M. R., & Olawoyin, R. (2018). Closing the gap: Between traditional and enterprise risk management systems. Professional Safety, 63(04), 42-47.