15 Essential Data Points to Help CRE Professionals Vet Tenants
Commercial real estate is increasingly turning to big data as an industry standard for lease underwriting. Gone, or at least swiftly going, are the days when emails, spreadsheets, and a few photocopied documents comprised the entirety of a tenant screening process. Today’s CRE professionals can view in aggregate a plethora of data with few limitations, thereby gaining valuable and immediate insight into tenant prospects. Benefits from data-driven tenant and building assessment include lease conversion optimization, retention of quality tenants, and an overall enhanced portfolio strategy.
In 2017, there are few factors with the potential for significant impact to a portfolio than choosing the right tenant. We have identified 15 data points on which CRE professionals need to focus based on three essential categories of lease underwriting.
Tenant. Acquiring a well-rounded picture of a tenant’s personal and business finances, include the following data points.
- Income—broken down by net revenue, adjusted gross profit, EBITDA, net income, and corporate annual rent expense
- Assets & Liabilities
- Debt/income ratio—provides insight into the financial fortitude of a tenant in the face of an economic or financial change
- Credit score—based on FICO score and additional real-time data aggregates
Industry. In commercial leasing, simply knowing a few data points on the tenant’s personal and professional finances and background gives an insufficient picture of tenant risk. This is why wise property owners also consider the following data points related to a prospective tenant’s industry. Comparing local data with national data in each of these areas can inform the level of risk within a specific industry a business/tenant poses to an owner.
- # of companies—provides insight into industry saturation and/or supply and demand
- Revenues (combined and average)
- # of new establishments—considered along with # of companies to speak to supply/demand and market saturation
- # of employees and payroll/net sales %—provides perspective on overhead along with industry comps
- Rent (average, per employee, and rent-to-sales ratio)
Lease. The last category of essential data points considers the potential tenant in a potential lease scenario with a landlord. The objective once the following data points are collected is to determine the lease risk based on net cash flow once the lease has been executed.
- Tenant allowance—includes any cash inducements paid by the landlord for building out a tenant space
- Rent (base rent, free rent, and other rent)
- Lease commissions—monies paid to CRE professional
- Legal & moving fees—negotiated tenant inducements offered by landlord
- Landlord tax & operating (e.g., utilities, security, real estate taxes)
- Net cash flow/$/SF—suggests how a property would perform once other data points are taken into account
Ultimately, CRE professionals should incorporate a consistent process of lease underwriting—like (RE)meter’s TIL Score—that gathers and analyzes the data points listed here to optimize their portfolios.