It may be a slow recovery, but we are certainly in the growth mode. With that comes an increase in leasing. Coming off a difficult economy means the review of your prospective tenant’s credit is even more important. Here are some key items to consider:- Can they pay the rent?
- Look at the whole company, not just their financial statement
- How long have they been in business? How many employees? What is the experience of management?
- Do they have a diversified customer base or count on one or two for most of their revenue?
- Do they have a unique product? Any patent protection? What are their competitive advantages or disadvantages?
- Evaluating the financial side
- Information sources
- Audited statements are best. From there, the order goes CPA reviewed, CPA prepared, then internally prepared. Tax returns are OK for small companies.
- Does the company have a bond rating? Check Standard & Poor’s or Moody’s .
- Ask for business plans and/or forecasts. If they don’t have them, ask more questions.
- Get references such as bankers, vendors, or accountants.
- Review company financials
- Look at the company’s net worth, total debt and debt-service burden, cash flow, and profitability trend. Do they produce enough operating cash flow to easily pay the new rent?
- Are there any conflicts of interest such as loans, sales, or leases to/from shareholders?
- Credit, what are the limits and capacity?
- Consider enhancements if their credit is weak
- Can they put up a letter of credit?
- Can they post a larger deposit?
- Consider having the tenant pay for their own tenant improvements.
- Of course, all of the above needs to be considered depending on how large of a space the tenant is taking in relation to the entire building.
- Information sources
- Look at the whole company, not just their financial statement
- Will they be compatible with the other tenants?
- Will their operations be a nuisance to neighboring tenants? Things to consider are smells (hair salons), noise (night clubs, machine shops), and volume of visitors (social service offices).
- Will their occupancy be an enhancement or detraction to the quality of your building?
- Nature of business (bank vs. rehab clinic)
- Respectful of others (you don’t want good tenants getting upset and leaving)
- Will they take care of their space and common areas?
- Visit their current space. Is it in good condition or does it look abused?
- How will they be to deal with? Do they seem antagonistic or easy to work with?
Of course, the above just skims the surface of a full due-diligence review of a prospective tenant. If it’s a large investment-grade tenant like Boeing, its easy. However, in most cases it takes a more careful review to ensure your next tenant is one you want.