4 Ways to Understand Your Tenant’s Financial Strength
Financial viability is one of the primary indicators of risk assessment in commercial real estate leasing. Owners want to make sure tenants can operate a successful business while paying rent on time and in full. In some cases, tenants have been known to play the system, so to speak, by jumping from one property to another to take advantage of initial leasing concessions. Financial viability includes both tracking a tenant’s leasing history as well as evaluating finances. Here are four of ways to understand your potential tenant’s financial strength.
- Collect documentation. Company financials can give a solid picture of tenants’ financial strength and are typically the first step in the process. Asking a potential tenant to submit the last 2-3 years of profit/loss statements, balance sheets, and taxes, as well as a personal financial is not out of the ordinary. What combination of these documents will be necessary to substantiate a tenant’s financial history will depend on the type (S-Corp, LLC, sole proprietorship) and age (years of operation) of the business.
- Determine need for additional supporting documents. Startup businesses are a special breed in that most small businesses show very little if any profit for up to the first year or two of operation. When processing a lease application for a startup business owner/potential tenant, the landlord will need to rely on personal financial statements in addition to 2-3 years tax returns of all stakeholders. Increasing the deposit amount and requiring first and last months rent may also lower a landlord’s risk in a commercial real estate lease.
- Analyze financial documents. Analyzing tenant financials can be an overwhelming and time consuming task. On one hand, landlords want confidence from seeing for themselves the financial viability of a potential tenant. On the other hand, it is often difficult and nearly impossible to achieve a comprehensive accurate analysis of all the data contained within tenants’ supporting documents. One helpful tool to expedite this process and ensure real-time data accuracy is to use (RE)meter’s TIL Score to analyze a tenant’s financial strength. Once the required data from tenant’s financial documents have been entered into the program, a report and tenant score is generated for landlords to measure a tenant’s financial strength.
- Run a credit check. In addition to having current financials to analyze, landlords will need to run credit checks on prospects to ensure accuracy of documentation of stated income, revolving credit, and debt. As The Press-Enterprise reports, “Since most small business owners are required to sign personal guarantees or have the leases written in their names, the personal FICO scores are important to a landlord, just as they are to a residential lender.”
Missing just one piece of the prospective tenant’s financial puzzle can end up costing a landlord great loss in the end. According to Austin Tenant Advisors, landlords should know the reasons why prospective tenants are planning to move, and what motivates them, adding that psychology can often play a role in tenant stability as well. Therefore, it’s worth taking the time upfront to thoroughly understand a tenant’s financial strength.