The Cyber Threat: Uncovering Digital Skeletons in the Closet

In today's interconnected world, the digital landscape presents a new frontier of risk for commercial real estate and business acquisitions. While traditional due diligence focuses on physical assets and financial records, a critical oversight can leave you vulnerable: cybersecurity. The digital infrastructure of a business or a smart building can harbor unseen vulnerabilities that, if exploited, can lead to catastrophic financial losses, reputational damage, and legal liabilities. This article, the first in our series "The Unseen Deal Killers," delves into the paramount importance of cybersecurity due diligence.

The commercial real estate (CRE) sector, once considered a low-risk target for cyberattacks, is now increasingly in the crosshairs. Property management systems, building automation systems (BAS), and even tenant data are attractive targets for cybercriminals. Similarly, in business acquisitions, the target company's entire digital footprint—from customer databases to proprietary intellectual property—can be a goldmine for malicious actors. A recent study from AON ranked cyberattacks as a top three risk facing construction and real estate organizations.

Many M&A processes still treat cybersecurity as an IT checklist item rather than a fundamental risk assessment. This approach is insufficient. A company might appear financially sound, but a single unpatched vulnerability or a history of data breaches can quickly erode its value post-acquisition. For CRE, the rise of smart buildings, while offering efficiency, also introduces a complex web of interconnected devices (IoT) that can be exploited if not properly secured. These operational technology (OT) systems, which control everything from HVAC to access control, are often overlooked in security assessments.

When conducting due diligence, consider these critical areas:

•Business Email Compromise (BEC) and Wire Fraud: This is a pervasive threat, particularly in real estate transactions involving large sums of money. Threat actors compromise email accounts to insert fraudulent payment instructions, diverting funds to their own accounts.

•Ransomware and Data Breaches: Attacks that encrypt critical data and demand a ransom, or breaches that expose sensitive personal identifiable information (PII) or proprietary data, can cripple operations and lead to massive regulatory fines and lawsuits.

•Vulnerable IoT and OT Systems: In smart buildings, unsecured sensors, cameras, and building management systems can be entry points for attackers to disrupt operations, steal data, or even cause physical damage.

•Third-Party Vendor Risk: Many businesses and CRE firms rely on a multitude of third-party vendors for IT services, property management software, and more. A vulnerability in one vendor's system can expose your entire operation.

•Employee Negligence and Insider Threats: Human error remains a significant factor in cyber incidents. Insufficient employee training or disgruntled insiders can inadvertently or intentionally expose sensitive information.

To mitigate these risks, expand your due diligence to include:

1.Comprehensive Cybersecurity Assessments: Go beyond basic IT audits. Engage cybersecurity experts to perform penetration testing, vulnerability assessments, and a review of the target's security policies and procedures.

2.Review of Incident Response Plans: Does the target have a robust plan in place to detect, respond to, and recover from a cyberattack? Test their readiness.

3.Data Governance and Privacy Compliance: Verify compliance with data privacy regulations such as GDPR and CCPA. Understand how personal and sensitive data is collected, stored, processed, and protected.

4.Third-Party Risk Management: Scrutinize the cybersecurity practices of all critical vendors and service providers. Understand their security posture and contractual obligations.

5.Employee Training and Awareness: Assess the target's cybersecurity training programs and employee awareness levels. A strong human firewall is as important as technological defenses.

6.Insurance Coverage Review: Ensure the target has adequate cyber insurance that covers potential losses from data breaches, ransomware, and other cyber incidents. (More on this in Part 5!)

Ignoring cybersecurity in due diligence is akin to buying a property without inspecting its foundation. The digital foundation of a business or a building is now as critical as its physical one. By proactively identifying and addressing cyber risks, you can protect your investments, maintain your reputation, and ensure the long-term success of your deals.

Stay tuned for tomorrow's article, where we'll tackle another controversial topic: "The 'Green' Premium Myth."

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