Don't Sign with a New Tenant Until You've Read This
A critical stage of the property management cycle is signing a new tenant. There are steps you can take now to ensure that no important considerations are overlooked. Finding a tenant that is fiscally responsible is only half the battle. It’s also important to match the tenant with the space.
It’s essential to do some work beforehand so you’re clear on what you will or will not negotiate and what type of tenant would be best for your property. Create a strong, standardized application process that covers essential details. This ensures that nothing is overlooked when the time comes to find a new tenant.
Before the need for a new tenant arises, you should have established criteria for qualification. These are the necessary characteristics of a tenant for the particular space. For example, you may only want to lease to non-competing businesses in a retail environment. If you aren’t willing to do a lot of renovation or custom building, the tenant must be one that is happy with the general layout of the space as-is.
A good way to get started on this is to ask the tenant for a copy of their business plan. This gives you an idea of their size, target audience, primary activities, and space requirements.
A preliminary screening of prospective tenant can reveal financial red flags and is an essential step early in the process. It should include a background check and credit information, at the minimum. If you don’t have time to complete this step yourself, services like Experian will do it for you. Their service is free to property owners, and provides this vital information on potential tenants:
- Credit Score, Credit Rating and Credit Score factors
- Name, Addresses (current / previous)
- Employers (current /previous)
- Credit Accounts and Payment Histories –collections, car loans, revolving and installment accounts.
- Public Record filings (evictions, bankruptcies, tax liens)
- Credit Inquiries (past 24 months)
Another important piece of information is the tenant’s leasing history. Any information on prior interactions with property owners can help you evaluate the prospective tenant.
A commercial property lease generally includes the requirement for a personal guarantee, which provides protection in the event of early lease termination or failure to pay rent. It basically makes the signatory responsible for making good on the contract. Details of this agreement can be negotiated. For example, it can be of a limited term and only in effect for a portion of the lease term. The guarantee can expire once the tenant meets specified requirements, usually including a history of reliable rent payments.
Personal guarantees are also sometimes limited by what’s sometimes called the “good guy guarantee.” In this case the landlord agrees not to enforce the tenant’s obligations when they end a lease early, provided that the tenant:
(a) provides the landlord with advance notice of intent to vacate
(b) leaves the premises in good condition
© is current on rent up to the date of departure.
It’s essential to go beyond the basic credit check when assessing a potential tenant for commercial space. Understanding their needs as well as your own requirements will help you make the best choice.