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Commercial Tenant Selection Criteria

Posted by admin on January 11, 2019
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Tenant’s reputation as a merchant or operator of said business is important. Their history in the business.
If it’s retail/restaurant, you should know:

Merchandise or Menu
Price Points
Level of Service
Sales of existing stores
Projected Sales

A personal credit check on the owner/operator

No judgments or collections
Credit check is usually performed after the lease terms are negotiated, however if the lease is complicated and time-consuming, it could be done before.
A credit check on the entity itself is important

  •  For national tenants, it is best to get a corporate guarantee from the parent company or the lease has no financial backing.

Tenant’s Financial Statement

Signed by tenant and reasonably current

Seeing ownership of real estate is reassuring because a tenant is less likely to leave without notice if he or she owns property.

Liquidity commensurate with the lease obligations and reasonable debt-to-equity ratio.

Setting a minimum net worth is not productive. It is better to evaluate each prospect in light of the space being leased, history of the tenant, probable investment by the property owner, risk involved, and condition of the building in the marketplace.

Small biz or startups should prepare a qualification package with business plan.

Tax returns are great supplemental tool to verify the financial statements and to evaluate the company’s ability to remain profitable.

Tenant Concerns

In offices and industrial properties, the use of the space is seldom the reason a tenant is turned down, although tenant mix is often taken into consideration (Ex. Manufacturing plant hiring too many people in Industrial Park).

Generally office & industrial tenants are evaluated based on their financial statements rather than their uses, except if the tenant uses hazardous chemicals or taboo businesses such as drug cultivation.

In shopping centers, financial statements, credit checks and the tenant as a merchant are analyzed along with how a business fits the shopping centers tenant mix.

  •  What are the tenants current sales? Does the tenant have a good reputation in the community?

The process of appraising prospective tenants is based on many factors:

  •  Tenants Financial Strength
  •  Tenant’s ability as a merchant
  •  Amount the owner has to spend on improvements particular use.
  •  Number of vacancies available on the property
  •  Number of vacancies available in the general marketing area.
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