Working with commercial property owners, we as brokers, are often charged with vetting potential new tenants. The depth of the qualification process depends on the property owner’s desire or if a corporate identity, what the policies dictate. This could range from a good gut feeling; to performing background checks, credit reports, reviewing tax returns and checking references. It also depends on the co-tenants of the property and what their leases may dictate as well. Good gut feelings are bad for business and often times performing background checks are overkill, but no matter what your method, select that method and stick to it across all of your clients. As brokers we must treat everyone fairly and with the same scrutiny, on behalf of our clients.
Just like applying for a job or a loan, the same care should be taken by a commercial tenant applicant in submitting the requested information as part of the process.
Here are the first 5 steps of my tenant qualification checklist and the review of a tenant application for a commercial lease. Several of the steps are plain common sense, but others can make or break the landlord’s decision based on the qualifications. Keep in mind this is a subjective process as there is no industry standard or clear-cut formula to reviewing a tenant’s qualification as there are so many options to securing the credit of a lease or minimizing the owner’s exposure.
Tenant Qualification Checklist 1-5
Is the application complete in its entirety? I use an eight page application that requests a lot of information. Besides company and personal information, customers, vendors, an asset and liability section and insurance information we also ask for the last two years’ tax returns. A signed application gives me the authority to run corporate and personal credit reports. I am surprised how often I receive incomplete or illegible information. When that happens it immediately sets the tone for the entire application package.
2. Business Plan
Does the prospective tenant have a business plan? A thorough business plan shows you know what you are doing. Yes, we often ask to review a business plan, especially for a new business. The plan should have all essential elements including market research, competition analysis and a budget. A business plan is not always expected as we could be leasing to a small office operation on one end of the scale or a corporate identity or franchise on the other.
What information and background is supplied to me by the tenant? Supporting documentation about you and your business can make or break the first impression. A resume of qualifications is important for the landlord to learn more about you and your background. His question is, Do you have what it takes to be successful?; This may be a new field and new venture, but what business background do you have? Include any material for your new business that will answer these questions and put him at ease.
4. Qualified Team
Does the team seem qualified? A qualified team shows you have support and backing. Include your partners, investors and even your employees to show you have the knowledgeable staff, advisers and support team to operate the business profitably. It is also good to have in your circle of advisers an attorney, insurance broker, accountant and banker.
What assets does the company have? There should be sufficient assets to carry the business for a period of time. The budget needs to show a realistic view of revenue and expenses for the first five years or the term of the lease. Liquid capital will need to be accessible to fill in the gap. You need to show the landlord you have enough cash for the security deposit, rent and tenant improvements as well as funds to cover the shortfall for a period of time until your revenue kicks in.
In my next article we cover steps 6 through 10 here.
Photo Credit: “Checklist” by holohololand FreeDigitalImage.com