Tenant Screening–Times You Wished You Had Done it Right
There’s no doubt about it: Commercial leasing will always involve some level of risk. Unfortunately, tenants do not always live up to their end of the deal. When hindsight is 20/20, what lessons can be learned from times you wished your screening process was more than a simple background check? Here’s two cases where owners wished they had done it right at the beginning of the lease underwriting process.
Referred to a property owner by a colleague, this tenant was touted as a good, hardworking guy with a long-standing reputation for running his own contracting business in the community. Now planning for retirement, the tenant had purchased a small specialty furniture business, which would be fit well in the owner’s portfolio. Having received from his colleague several successful tenant referrals in the past, the property owner was excited to sign the lease. Still, he ran a background check and personally reviewed the tenant’s last two years’ tax returns. Fourteen months into the lease, the tenant lost his battle with a downturn in the economy, which caused the price of lumber to skyrocket and the demand for specialty furniture to decline. Using all of his personal equity to no avail, the tenant closed his doors and breached his lease.
Hindsight: Had the owner completed a thorough screening, he would have found that the tenant had little resources to fall back on in the event his business took a hit (as it did). In addition, had the owner researched the specialty furniture market, he would have seen it was on the downside of its peak at the time the tenant first applied for the property.
Tenant approached owner with a startup business for which she had secured funds from a local bank. With stellar credit, backing from a trusted bank, and outstanding references, the tenant seemed like a great candidate for a 5-year lease. Seven months into the executed lease, the tenant’s divorce was finalized, which required the sale of her home and all marital assets, including cash in bank, to be split between them. The tenant stopped working the business because the bank refused to release him from the business loan, which entitled him to part of the profits as well.
Hindsight: A thorough background check would have revealed the pending divorce at the time of lease underwriting and court records showing a highly litigated, messy, and expensive one at that. With this information, the owner could have asked more directed questions of the tenant or built into the lease safeguards against an outcome of which he found himself at the losing end.
In the 21st century marketplace, commercial lease professionals cannot afford to forego essential tenant screening elements like full background checks, real-time financial status, and industry specific research, including trends and market saturation. (RE)meter’s TIL Score provides this and more, making it less likely for you to suffer from 20/20 hindsight.