Evaluating Prospective Commercial Real Estate Tenants

Evaluating Prospective Commercial Real Estate Tenants

Commercial property owners looking to fill vacancies should always evaluate prospective tenants before agreeing to enter into a lease. There is little to be gained from entering into a lease with a commercial tenant if that tenant won’t be able to fulfill the terms of the lease.

There are a number of factors that owners should consider when evaluating tenants, and they fall into two main categories: (1) the prospective tenant’s financial stability; and (2) the prospective tenant’s potential for success.

Financial Stability

The prospective tenant must be able to afford the rent that you set. Its overall financial condition should be sound and one of the best ways to determine whether this is the case is to see if they pay their bills on time. Having a reputable credit agency do a credit check on the tenant is a simple and fast way to determine financial stability. You can also talk to the tenant’s main suppliers and its current landlord.

An examination of the tenant’s assets is also essential. Ask to see the tenant’s financial records, study them carefully, and discuss with the prospective tenant’s accountant any questions you may wish to have clarified.

Potential For Success

Once you are satisfied that the prospective tenant is financially stable, you must ask the question: Will the tenant be successful in your center?

To answer this question you can consider the following:

  • The tenant’s reputation at its present location.
  • The tenant’s sales volume. In the retail business, a turnover of stock at the rate of four to five times a year is considered good.
  • The trend of the tenant’s sales. Has the tenant’s sales been increasing from year to year?
  • The type of merchandise the tenant will be selling in your center. You’ll look to avoid duplications with other tenants in the center.
  • The profile of the tenant’s average customer at its present location.
  • How efficiently is the tenant’s business now being run? Is the efficiency or inefficiency likely to continue?
  • The nature and extent of the tenant’s advertising.

What To Do When a Tenant Has No Track Record?

The previous suggestions work well with prospective tenants that have an established record, who have been in business and therefore offer tangible evidence of performance.

But what about a newly owned business that wants to rent space in your commercial property as its first-ever place of business?

You should appraise this kind of prospective tenant by using the same two key standards: financial stability and potential for success. But instead of looking at past records, you will be predicting and forecasting and making judgments about the prospective tenant’s ability, ideas, and business expertise. It is a riskier situation for you as owner-manager, but one that can pay great dividends if that new business generates new interest in your property.