The Risk Factors Section: Boilerplate vs Deal-Specific
Thirty pages nobody reads, containing perhaps eight paragraphs that could not have been written about any other property in the country. Finding those eight is the exercise.
The risk factors section is the longest part of a memorandum and the part most reliably skipped. Its length is a consequence of its purpose: every disclosed risk is one an investor cannot later say they were not warned about, so counsel discloses everything.
The result is thirty pages in which perhaps eight paragraphs contain information. Finding them is a mechanical exercise.
The test¶
Could this paragraph have been written about any other property in the United States?
If yes, it is boilerplate. It is there for the issuer's protection and it tells you nothing about this deal.
If no — if it names this asset, this submarket, this loan, this business plan or this sponsor — somebody wrote it deliberately, and they wrote it because they had to.
| Generic | Deal-specific |
|---|---|
| "Real estate investments are illiquid" | "The property's largest employer in the submarket announced a reduction in force in the prior year" |
| "Interest rates may rise" | "The loan bears interest at a floating rate and the interest rate cap expires 24 months before the anticipated sale" |
| "The business plan may not be achieved" | "Approximately 40% of units are subject to leases that do not expire within the renovation schedule" |
| "The sponsor has conflicts of interest" | "An affiliate of the sponsor will act as general contractor for the renovation" |
| "Past performance does not guarantee future results" | "The sponsor has not previously operated an asset of this size or in this market" |
Where the specific entries hide¶
Not at the beginning, where the generic market and liquidity risks sit, and usually not at the end, where the tax and securities-law disclosures go.
They tend to appear in the middle, inserted into a standard template at the point where the template covers the same category. A paragraph about the property's tenant concentration will sit inside the block of generic paragraphs about tenant risk.
This is not concealment. It is what happens when specific language is added to a form document. The consequence is the same: the paragraphs that matter are surrounded by paragraphs that do not, and a reader skimming for interesting language finds none, because none of it is written to be interesting.
Categories worth reading closely¶
Four blocks repay attention even where they look generic, because the specific detail is often a single clause inside an otherwise standard paragraph.
Financing risks. Read every word. This is where floating rates, cap expiry, maturity dates, covenant tests, recourse carve-outs and refinancing assumptions are disclosed. The generic sentence "the loan matures before the anticipated hold period ends" is not generic at all.
Sponsor and management risks. Where a sponsor discloses inexperience with an asset type, a market or a size. Also where key-person dependency appears.
Business plan risks. Where the specific execution assumptions are disclosed: renovation scope, timeline, achievable premiums, the number of units that can actually be turned in a given period.
Conflicts. Affiliate contractors, affiliate management, affiliate brokerage, allocation of opportunities between the sponsor's several funds. See related party transactions.
The categories worth counting¶
A rough but useful exercise: count the deal-specific entries by category. The distribution tells you where the sponsor's own concern sits.
A memorandum with six specific financing risks and none about the business plan is disclosing a deal whose author is worried about the debt. One with four specific entries about lease expiry, tenant concentration and renovation scope is disclosing execution concern. Both are useful and neither is stated anywhere as a conclusion.
The count also catches the opposite case: a long section with no deal-specific entries at all, which means either an unusually clean transaction or a template that was never customized. The second is more common, and it means the section has told you nothing about this particular deal.
What to do with what you find¶
Quote it back. "Your risk factors mention that an affiliate will act as general contractor — how is that contract priced, and who reviews the change orders?" is a specific question generated by the sponsor's own document, and it invites a specific answer.
The alternative — reading the section, feeling vaguely uneasy, and deciding on the basis of the deck — is the outcome the section's length is, in effect, designed to produce.
One closing observation: a short risk factors section is more concerning than a long one. The disclosure obligation does not shrink with the page count, and an issuer that has disclosed less has protected itself less — which usually means the document was produced quickly rather than that the deal is safer.
Primary sources
Every factual claim above is traceable to a filing, a rule or an agency publication. These are the ones this article relies on.
Questions readers ask
Why is the risk factors section so long?
Because it is written to protect the issuer. Every disclosed risk is one an investor cannot later claim they were not told about, so counsel includes everything, and the generic majority crowds out the specific minority.
How do I tell boilerplate from a real disclosure?
Ask whether the paragraph could have been written about any other property in the country. If it could, it is generic. If it names this asset, this market, this loan or this sponsor, it was written for this deal.
Does a long risk section mean the deal is risky?
No. It usually means the issuer's counsel was thorough. A short risk section is more concerning than a long one, because the disclosure obligation does not shrink with the page count.
Where are the specific risks usually placed?
Frequently in the middle of the list, surrounded by generic entries. That is not necessarily deliberate; it is what happens when specific paragraphs are inserted into a standard template.
Should I ask about a risk factor I find concerning?
Yes, and quoting it back is a good way to do it. It is the sponsor's own document and it invites a specific answer about how that risk is being managed.
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