3 Ways the TIL Score Helps CRE Pros Underwrite Leases Easily
One of the single most important decisions CRE professionals will make is choosing tenants to fill their vacant properties. The impact of leasing wisely (or unwisely) can be game changing. David P. Resnick, Partner at Chicago’s Robbins, Salomon, & Patt, Ltd., writing for Law Journal Newsletters, explains, “After all, the success of leased real estate, as well as the property owner’s ability to borrow against that asset, is dependent upon the stability of its tenants.” (Source: Strategies for Assessing Tenant Credit).
Furthermore, today’s economy of startups, collaborations, and emerging market trends is putting more pressure on owners to act swiftly in choosing tenants wisely. As explained in a Deloitte 2017 industry outlook article, “Companies face challenges from new competitors that are providing dynamically configurable spaces and flexible leases. Owners need to rethink their approach toward space design, lease administration, and lease duration.”
The lease underwriting process involves asking pertinent questions that look back into a tenant’s history and peer forward into an industry’s future to determine whether tenant and property/owner will or will not be a good match. Ascertaining a TIL Score can make the difference for owners between success and failure, with money, time, and property value on the line.
To this end, CRE professionals can find peace of mind and easily access accurate and comprehensive reporting in (RE)meter’s TIL Score platform.
TIL Score Basics
The TIL Score represents the convergence of three different areas of analysis weighted to create an average or TIL Score. (A sample report can be downloaded for free at http://www.re-meter.com/pdf/TIL-Sample.pdf.) Each component of the TIL score represents an essential piece to a puzzle that can quickly and easily help CRE professionals underwrite leases of any size transaction (1,000-100,000+ SF), for any type of tenant.
- The Tenant Score is comprised of two sets of financial indexes that measure economic business performance and business risk. The indexes are comprised of 10 separate benchmarks on the tenant vs. their local industry competitors. Business performance factors relate to financial industry benchmarks that reflect growth and financial margins of a company, which are influenced by the ability of the company to pay rent. Business risk factors reflect the size, liquidity, leverage, and efficient use of a company’s assets, which, again, are influenced by the ability of the company to pay rent.
- The Industry Score is comprised of these 10 financial benchmarks used on the tenant’s local industry vs. the tenant’s industry nationally. For example, a department store tenant seeking commercial space in Stuart, Florida would be measured by how department stores are performing in the local Stuart market as well as nationwide.
- The Lease Score is comprised of three benchmarks based on the lease structure, which include capitalized costs, lease commissions, and rent abatement. It provides critical insight into how a lease structure customized for a particular tenant in a particular industry can be expected to perform in various scenarios.
The TIL Score assesses not only the “Risk” of a potential lease transaction, but also the “Value Creation” of a potential lease transaction. How much risk and where the risk lies—in the tenant, industry, or lease—is easily revealed by the TIL Score. How much value created by the lease transaction as compared to average property/asset class cap rates can be revealed as well.