Rich Lipsky
Navigating Financial Strategies in Commercial Real Estate: Insights from a Seasoned CFO
With over 30 years of experience in the commercial real estate industry, Rich Lipsky, Executive Vice President and Chief Financial Officer at David S. Brown Enterprises, Ltd., has developed a wealth of financial expertise. In his role, he oversees the financial operations of a diverse portfolio, including over 3.5 million square feet of office and retail space, as well as more than 2,000 apartment units. Rich has a proven track record of navigating complex financial landscapes, from securing financing and managing debt to executing large-scale capital transactions. His leadership in financial strategy has not only driven the company’s growth but also enhanced its resilience in an ever-evolving market. In this exclusive Q&A, Rich shares key insights on how financial data drives decision-making, the impact of rising interest rates, and best practices for managing cash flow in today’s challenging market. His strategic approach to budgeting, forecasting, and navigating debt ensures stability and growth for the company’s extensive portfolio.
- How can brokers and business professionals use financial data to make informed decisions? The brokers and decision makers need to use the data from proposed leases to determine the financial return. The relevant data is the rent, the cost of tenant improvements, commissions, and length of term. I also suggest understanding the financial reliability of the proposed tenant. Having them provide a personal financial statement, resume and tax returns will assist in assessing the risk of failure. For higher-risk tenants, a higher rental rate may be necessary to offset potential risks.4
- What trends are you seeing in commercial real estate financing? Interest rates are driving up the cost of projects and making many projects unfeasible. Long-term rates are still relatively low and I’m seeing a good amount of permanent lending on stabilized projects. Multifamily and retail properties continue to be the preferred choices for most lenders, while office spaces, unless medical, are increasingly being avoided.
- How can a firm effectively manage cash flow in a commercial real estate business? The largest use of funds of an asset is debt service. Locking this cost in a long-term debt with a fixed rate as soon as the asset is stabilized is key. It is also key not to overleverage the property with debt. Understanding the net operating income of the project and making sure that it is more than ample to cover the debt service and still have cash flow is very important before you close on the permanent loan.
- What are the best practices for budgeting and forecasting in commercial real estate? I believe in being very conservative when looking at occupancy and bad debt. Assume a longer amount of time on tenant turnovers. Also build in a solid buffer on tenant improvement costs. Most Tenant Improvement projects are coming in much higher than several years ago due to inflation.
- How do interest rates impact commercial real estate investments? Higher short-term interest rates are increasing the cost of new projects, making some developments less financially feasible. Investors must account for these increased costs when planning and executing new investments.
- What are the benefits and challenges of using debt to finance commercial real estate projects? The primary benefit of using debt is being able to spread cash to more projects and spark greater growth. However, the challenge lies in the current interest rate environment, which can render some projects financially unfeasible due to the increased cost of borrowing.
- How can businesses prepare for economic downturns in the commercial real estate market? Diversification of assets is key to enduring economic downturns. Very rarely do all asset types experience a downturn at the same time. Diversification will ensure a steady cashflow to the investor. Also suggest holding ample reserves for improvements. These can also help meet operating costs and debt service if assets experience unexpected vacancies or bad debt due to the economy.
- What are the most common financial mistakes made by new investors in commercial real estate? One of the most common mistakes is underestimating financing costs and the need for contingency funds in new developments. Both can drive a project and eat up cash very quickly if not anticipated; potentially jeopardizing the entire project.
- What advice would you give to someone looking to advance their career in commercial real estate finance? Gain a deep understanding of the operations of the assets you’re financing. I spent many years overseeing property management & leasing for a commercial real estate company and was very involved with the development team as well. Understanding the challenges and opportunities helps in avoiding unintended consequences and maximizes the cash flow of assets, making you a more effective finance professional.
- What are the most effective ways to reduce operating expenses in commercial properties? Implementing energy-efficient upgrades, such as LED lighting and smart HVAC systems, can significantly reduce utility costs. Regular maintenance and preventative care prevent costly repairs and extend the lifespan of assets. Negotiating vendor contracts and optimizing space utilization can also lead to substantial savings. Additionally, leveraging technology for automation and integrating water conservation measures can further reduce expenses without compromising service quality.
- What are the key financial indicators of a successful commercial real estate project? Key financial indicators include a strong rental rate, occupancy and net operating income. Positive cash flow and a low loan-to-value suggests sensible financing and decreased risk.
