Finding Tenants Who Will Make Good on a Commercial Lease
Finding quality tenants for Commercial Real Estate is a bit different than Residential. You can have a very responsible individual with high net worth sign the lease, but still have problems in the future. Why is this the case? Well realistically their net worth is meaningless unless they own enormous amounts of capital and by that time they might as well purchase a property of their own. Instead of looking at their current value, you must be able to monitor their income and also project for the future where that income will be. Property owners need to think outside of the box with this.
If the company is a mill and you are aware that there will be a new local ordinance that regulates deforestation, you might want to give the company a second look. The new ordinance could cripple their product source and force the company to move or shutdown. Staying up with the local news of the industry that that company is in is therefore important.
You also want to look at the company’s profit history. Is income steadily increasing or does it have dry spells and booms? Every circumstance is different. The bottom line is will the tenant based off of his/her company profits be able to consistently make all payments? If any of the above variables put that into question, you might want to reconsider. It’s ok to talk out these concerns with the tenant about how they plan to accommodate these environmental variables.
It’s possible that profits increase and decrease based on season or some other predictable environmental variable. Imagine a company that manufactures snow globes. This company can be predicted to increase profits significantly during the holiday season and then drop off again in the summer. It might be convenient to set up a lease plan that collects rent payments when it is the most likely to be paid by the company, when it is making money.