Going Concern in Today’s Real Estate Market: What Owners, Operators, Developers, and Investors Need to Know

The real estate industry continues to face a challenging operating environment. Many owners and developers are navigating higher borrowing costs, upcoming debt maturities, refinancing uncertainty, evolving lender requirements, and pressure on liquidity. While these conditions do not necessarily indicate financial distress, they have increased attention on a financial reporting concept that has become increasingly relevant across the industry: going concern.

Understanding what going concern means and how it may affect financial reporting can help management proactively address potential concerns before year-end.

What Is Going Concern and Why Does It Matter?

Under U.S. GAAP, financial statements are generally prepared under the assumption that an entity will continue operating and meeting its obligations in the ordinary course of business. This concept is commonly referred to as the "going concern" basis of accounting. Management's responsibilities related to going concern are governed by the FASB Accounting Standards Codification (ASC) 205-40, Presentation of Financial Statements - Going Concern.

As part of preparing financial statements, management is required to evaluate whether conditions and events indicate if there is substantial doubt about the entity's ability to continue as a going concern for the year subsequent to the date the financial statements are issued or the date the financial statements are available to be issued. Substantial doubt about an entity’s ability to continue as a going concern exists when aggregate conditions and events indicate it is probable that the entity will not be able to meet its obligations as they are due during the year following the date the financial statements are available to be issued. The assessment focuses primarily on liquidity, cash flow, debt obligations, and access to financing.

Importantly, a going concern issue does not automatically mean a company is failing, insolvent, or preparing to liquidate. The analysis centers on whether an organization can successfully navigate near-term obligations, particularly debt maturities and refinancing requirements, during the assessment period.

Why Real Estate Companies Face Unique Challenges

Going concern considerations can arise in virtually any industry, but several characteristics of the real estate sector make the assessment particularly important.

Real estate businesses often rely on significant leverage, property-level debt, construction financing, and periodic refinancing to support operations and growth. Cash flows may also be concentrated among a limited number of key tenants or constrained by capital projects, free rent periods and other leasing costs.

As a result, even organizations with valuable real estate holdings and strong long-term prospects may face short-term liquidity challenges if financing becomes difficult to obtain, or debt obligations come due before alternative funding sources are secured.

Common Real Estate Events That May Trigger a Going Concern Assessment

A variety of circumstances may cause management to evaluate whether substantial doubt exists. Common examples include:

• Significant loan maturities approaching within the next year
• Uncertainty surrounding debt refinancing or extension negotiations
• Loan covenant violations or defaults
• Recurring operating cash flow deficits
• Loss of major tenants or significant lease expirations
• Reduced access to financing or credit facilities

No single event automatically results in a going concern disclosure. Rather, management must evaluate all relevant conditions and events collectively and consider their impact on the organization's ability to meet obligations as they become due.

Management’s Assessment and Mitigation Plans

When conditions and events raise doubts about an entity’s ability to continue as a going concern, management must evaluate whether plans exist that can effectively alleviate those concerns.

Common mitigation strategies in the real estate industry may include:

• Refinancing or restructuring (including extending or modifying) existing debt
• Securing new financing arrangements
• Selling assets
• Reducing operating expenditures
• Obtaining financial support from owners, investors, or affiliates

However, not every contemplated mitigation action automatically alleviates a going concern issue. Management's plans are considered to alleviate the substantial doubt if it is probable the plans (a) will be implemented effectively within one year from the date the financial statements are issued or available to be issued and (b) mitigate the conditions and events that raise substantial doubt. Simply identifying a potential solution is not enough. Management must evaluate whether the solution is realistic and achievable based on the facts and circumstances.

The Important Role of Sponsor Support

For privately held real estate organizations, sponsor support is often a key component of management's plans. Sponsor support may include capital contribution commitments from owners, funding from affiliated entities, and/or other forms of financial assistance.

Many owners assume that because they are willing to support the organization, a going concern issue no longer exists. In practice, the analysis is more nuanced.

Both management and auditors need to evaluate not only a sponsor's intent to provide support, but also the sponsor's ability to provide the necessary financial resources. Support arrangements are often expected to be supported by formal documentation and evidence demonstrating that the sponsor has the financial capacity to fulfill the commitment. A stated willingness to provide support, without evidence of financial capacity, may not be sufficient to alleviate a going concern issue.

Impact on Financial Statement Disclosures

ASC 205-40 requires disclosures when conditions and events raise substantial doubt about an entity's ability to continue as a going concern. In some cases, management's plans may successfully alleviate the concern. Even then, financial statement disclosures are required to explain the conditions or events that initially raised the doubt, management’s evaluation, and the plans that alleviated the doubt.

When substantial doubt remains after considering management's plans, the financial statement disclosures become more extensive and include a specific statement in the auditor’s report indicating that substantial doubt exists regarding the entity's ability to continue as a going concern. The objective of these disclosures is transparency. Investors, lenders, and other financial statement users should understand both the risks facing the organization and management's plans to address them.

What Auditors Look For

Auditors are required to evaluate management's assessment of going concern and consider whether substantial doubt exists and whether management has identified plans that effectively alleviate the going concern issue. The auditor's procedures commonly focus on areas such as cash flow forecasts, loan maturities and debt compliance, loan refinancing and restructuring plans, and sponsor support arrangements.

A common misconception is that auditors create the going concern assessment. However, according to professional standards, management is responsible for performing the assessment, while auditors evaluate the reasonableness of management's conclusions and the adequacy of related disclosures.

Looking Ahead

As refinancing activity, liquidity management, and lender negotiations continue to be important topics throughout the real estate industry, organizations should evaluate potential going concern considerations early rather than waiting until year-end. Proactive assessments, well-supported forecasts, documented financing plans, and properly structured sponsor support arrangements can help management navigate both the business and financial reporting implications of these matters.

How Citrin Cooperman Can Help

Citrin Cooperman's Real Estate Industry Practice works with owners, operators, developers, investment funds, management companies, and investors to navigate the financial reporting and operational challenges associated with today's market environment. Our professionals assist clients in evaluating liquidity considerations, assessing the impact of debt maturities and refinancing strategies, addressing financial statement disclosure requirements, and understanding the reporting implications that may arise in audits, reviews, and compilations. By addressing these matters proactively, organizations can better position themselves to communicate effectively with lenders, investors, and other stakeholders while meeting their financial reporting responsibilities.