What are the risks of commercial real estate lending?

[Blue Hen]

Broadly speaking, what are the risks of commercial real estate lending?

[Melanie O]

1. Market Risk: Market risk arises from the possibility of a decline in the value of a property due to economic conditions in its geographic area, changes in interest rates and changes in local zoning or use restrictions.

2. Refinancing Risk: Because of uncertain economic conditions, lenders may not be able to obtain new debt or equity when existing loans come due. This may cause the loan to default, resulting in losses for the lender.

3. Property Risk: Property risk is the risk that physical damage to a property will reduce its value or create unanticipated costs. This could include major repairs or disasters such as floods or fire.

4. Vacancy Risk: Vacancy risk occurs when tenants leave and must be replaced in order to maintain income. This can cause a lender’s cash flow to diminish, eventually leading to loan default.

5. Loan Control Risk: This occurs when a lender has a lack of control over a loan and therefore cannot properly monitor and manage the risks.