By Matthew Hausman

When a real estate asset is under stress, the timeline to identify a going concern can compress fast. Rising interest rates, refinancing uncertainty, and tighter capital markets can create real pressure on real estate operators. Even when the underlying properties are stable, a near-term maturity or debt covenant compliance pressure can raise important financial reporting questions.

“Going Concern” in Plain English

Under U.S. GAAP, there is a presumption that a reporting entity will continue to operate and meet its obligations in the normal course of business as a going concern. This presumption requires management to evaluate whether there is potentially substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued or available to be issued. If substantial doubt exists, disclosures are required, and if management’s plans are expected to alleviate that doubt, those plans must also be disclosed along with the basis for concluding they will be effective.

It is important to frame this correctly: a going concern evaluation is not a prediction of failure. It is a structured, evidence-based assessment that uses known facts, reasonable assumptions, and documented management plans to determine whether obligations can be met. Many entities complete the evaluation and conclude no disclosure is required. The discipline of the process itself, and the documentation it produces, is what matters most.

What Typically Triggers Deeper Evaluation in Real Estate

Real estate entities face a distinct set of risk factors that can accelerate the need for a more in-depth going concern evaluation. The most common triggers include:

• Significant debt or interest rate portion maturities within the next 12 months, particularly where refinancing or a replacement instrument is not yet committed or where current market rates materially increase debt service requirements or the cost/ability to replace the interest rate protection arrangement.
• Refinance uncertainty or absence of committed financing, especially in a market where lenders are tightening underwriting standards or pulling back from certain asset classes.
• Financial covenant violations or probable violations, including debt service coverage ratio (DSCR) shortfalls, loan-to-value breaches, or reserve deficiencies that could trigger acceleration of debt repayment.
• Negative operating trends, including sustained occupancy declines, loss of a major anchor tenant, revenue shortfalls versus underwriting, unexpected increases in property assessments or operating expenses, or unplanned capital improvements.
• Liquidity strain, including depleted operating reserves, limited or fully drawn revolving credit facilities, and insufficient cash to fund near-term obligations

Any one of these factors may not independently create substantial doubt, but in combination, particularly in the current interest rate environment, they can quickly shift the analysis.

What Documentation Matters Most

The forecast should cover at minimum the 12-month look-forward period and include projected net cash flows from operations, expected debt service obligations, upcoming maturities, capital expenditure requirements, and any known contingencies. It should also include a sensitivity analysis stress-testing key assumptions such as occupancy, rent growth, refinancing terms and significant operating expenses. This strengthens the credibility of the forecast and demonstrates that management has considered downside scenarios.

Evidence supporting management’s plans to mitigate potential unfavorable circumstances is equally important. Auditors will scrutinize whether the plans are objectively supportable. Acceptable forms of evidence include:

• Written lender communications and term sheets evidencing active refinancing discussions
• Signed listing agreements or letters of intent supporting planned asset sales
• Board or member resolutions authorizing capital contributions or equity raises
• Investor commitment letters or documented liquidity of guarantors
• Executed or near-executed lease agreements that support occupancy projections

Undocumented or verbal representations carry little weight in the audit process and generally will not be relied upon as the primary basis for concluding that substantial doubt has been alleviated.

Plans should be realistic and supported to make them more credible. Refinancing plans carry more weight when backed by lender discussions or term sheets. Asset sale plans are stronger when supported by listing agreements or active marketing. Capital support plans are more credible when accompanied by documented commitments or demonstrated ability to fund. Plans that are contingent on uncertain future events, such as a general market improvement or an anticipated but uncommitted lender relationship, are unlikely to fully alleviate substantial doubt without additional corroboration. Management should be prepared to explain, in writing, why each plan is realistic and achievable within the look-forward period.

Impairment: A Related but Separate Topic

Real estate stress can also raise impairment considerations under U.S. GAAP. Impairment addresses whether the carrying value of a property exceeds its fair value, based on expected future cash flows and/or market values of comparable properties. Going concern analysis, by contrast, asks whether the entity can meet its financial obligations over the next 12 months. The two analyses share common inputs — operating cash flow projections, asset values, and market conditions — but they answer fundamentally different questions and are governed by different accounting standards. A property may be impaired without raising doubt about the entity’s ability to continue as a going concern.  Conversely, an entity may face substantial doubt about it’s ability to continue as a going concern without any individual asset or property being impaired. Both analyses should be performed independently and documented separately.

Audit Considerations – Why Addressing This Early Helps

In practice, going concern evaluations that are deferred until audit fieldwork nears completion create significant challenges. Auditors face time pressure, management may not have had adequate time to assemble supporting documentation, and last-minute disclosures can create inconsistencies with prior communications to lenders, investors, or regulators.

Preparing a stand-alone going concern memo in advance, ideally before or concurrent with the start of audit fieldwork, allows management to present a complete, organized, and internally consistent analysis. It also enables a more productive dialogue with auditors, reduces the risk of scope expansion, and ensures that any required disclosures are drafted thoughtfully rather than reactively. For entities with active lender or investor relationships, early preparation also allows management to align financial statement disclosures with external communications before the statements are issued.

Quick Going Concern Evaluation Checklist

• Maintain a 12-month debt maturity and covenant calendar — updated at least quarterly, with trigger dates and required actions clearly identified.
• Maintain a 12-month liquidity schedule — covering available cash, undrawn borrowing capacity, net projected cash inflows, and all projected required expenses and other payments.
• Prepare a forward-looking forecast with sensitivity cases — stress-test key assumptions and document the basis for each.
• Preserve all evidence of management plans — lender emails, term sheets, board approvals, listing agreements, and investor commitments should be retained and organized.
• Draft financial statement disclosures early — if disclosure appears likely, prepare draft language before audit fieldwork begins so that wording can be reviewed carefully and refined before presenting to auditors.

Having an experienced team like Miller Cooper & Co., LTD to help you navigate these complex areas and help ease the burden to allow you to focus on growing your business. As always, our advisors are here to help if you have further questions on this critical topic. Contact Matthew Hausman, Miller Cooper Principal from our Real Estate group with any questions.