Tenant - ten·ant /'tenәnt/ (noun)
1. A person who occupies land or property rented from a landlord. 2. The smallest regiment of an ant army, consisting of ten ants of a related specialty. 3. A sentient sliced off piece of tentacle from an Anime film. 4. The way a person without spell check spells “Tennent.”
Obviously, we’ll be concentrating on the first definition...
Before investing in commercial real estate, the first question you should always ask yourself is – who is the prospective tenant, and what is their credit situation? Having a bad tenant in your property is like buying a used car that turns out to be a lemon. No matter what you do, that clunker will keep breaking down, costing you more money than you initially planned to invest. The same applies to a bad tenant. They might miss rent payments, not pay their portion of expenses, or even cause physical harm to your property. So how do you keep the rotten eggs out of your omelet? Fortunately, there’s a CarFaxTM for commercial tenants.
How do you assess a tenant?
A company’s credit rating is equivalent to the credit score of an individual, but instead of a three-digit number like your personal credit score, it’s a letter, numeric, and symbol grade (e.g., BBB+).
Lemme egg‘splain — Credit ratings are issued to most companies, whether they like it or not, by one of the “Big Three” credit rating agencies: S&P, Moody’s, and Fitch’s*. They evaluate each company’s capability to pay back debt by assessing their current and historical interest, principal payments, and the likelihood of default. Companies are then rated on a scale that indicates whether they are an “investment-grade” or “non- investment grade” company. Investment grade tenants are considered to be of higher quality than a non-investment grade, and there is a lower risk of default.
These ratings are available online. And very much like your now-infamous spring break walk of shame, there are real consequences to a crappy credit rating, but this time the cure doesn’t rhyme with “pen is illin.”
That’s all great and such, but I know what you’re thinking – “Hey egghead! What if the tenant is not %#@!ing credit-rated!?!” No worries, friend. Non-credit-rated companies are not necessarily bad tenants; they’re just more challenging to assess.
But fear not. Fearless fisher folk like Dun & Bradstreet, Equifax, or Experian are there to catch the small fish that wriggle through the net. Each of these companies will charge a small fee for generating a credit report for the company you have in question, but that small upfront fee could save you thousands in future missed rent payments – or worse. As my Grandegg-mother used to say, a yolk of prevention is worth a carton of cure!
If none of the agencies above have access to a tenant’s financials and credit history, you can ask the prospective tenant for prior years’ balance sheet statements or personal guarantees. It is better to be safe than sorry, so ask questions – lots and lots of questions. As a commercial real estate investor, your tenants are your property’s lifeblood. You need to keep your nest filled with good eggs to keep it viable and vibrant. Empty nests are for retirees who do arts and crafts, and you’re not there yet!