Managing commercial real estate can be a complicated puzzle that requires coordination from many parties. From acquiring land to planning redevelopment to finding the right clients, commercial real estate is a big business.
CRE brokers are responsible for advising new owners on the best way to rent out spaces to commercial tenants--a process that can be overwhelming. Choosing the right commercial tenants is very different than choosing residential tenants.
Let’s take a closer look at four important things that all CRE brokers should know about the tenant screening process.
1. Dig deeper on short lease terms
During the screening process, the potential CRE tenant will likely discuss the lease length that they would like to consider.
If the tenant suggests a one- or two-year lease, it’s time to find out why they want a shorter lease. In most cases, landlords look for 5- or 10-year leases because these are more financially stable commitments. If a tenant wants a shorter lease, it’s important to find out why. It could be a a smaller company that’s planning to scale quickly, or a government contract granting funds that will only last for a limited lease period.
In other cases, the short lease might be a sign of instability. Knowing why they want a shorter lease will help you understand if the tenant is right for the property or not.
2. Look for multiple guarantors
Every business looking to lease commercial real estate has some type of financial backing. In some cases, that is from the sole owner and no one else. In other cases, many people are financially invested in the business.
When a tenant only has themselves as the financial guarantor, the landlord will need to consider whether this is enough collateral to risk if the business should for some reason fall into default during market changes.
Most landlords prefer to have at least two backers involved. In the cause of a defaulting lease, having multiple guarantors is usually the only way that a landlord will ever be able to recoup money lost due to unpaid rent or other expenses incurred by a failing business tenant.
If a potential tenant has only themselves as a guarantor, it is time to look carefully at their business model and the business financials to get an understanding of whether or not this business will be able to be a good long-term investment for the property.
It’s always safer to choose a tenant that has a multitude of different financial backings to ensure that the commercial property is not put into too much of a risky situation.
3. Use a reliable tool to make screening simpler
While it’s great to be very hands-on in the tenant screening process, there’s no avoiding that many things will take a lot of time! Instead of doing everything yourself, using a paid tool to make your work more efficient is a great way to save time and, ultimately, money.
RentPrep offers a streamlined report known as SmartMove. This report includes the following information that many CRE brokers find helpful when working with tenants:
- A full credit report, which includes all credit information
- A traditional background check
- Optimized readings that help indicate if a client is likely to be a good one or not
- Past rental information, including any court judgments regarding rent
Using tools such as RentPrep that are specifically programmed to highlight key tenant screening factors is a sure way to shorten the amount of time that you have to spend on the process. Less work for brokers and owners make the entire tenant screening process less frustrating.
4. Risk assessment decides it all
You and your client are going to get some gut reactions to the potential tenant that you meet, there’s no way around that. From feeling like you’ve known the tenant forever to getting a generally negative vibe from them, these feelings are likely to influence your decision if left unchecked.
The final decision between top-ranked tenants, however, should always be done based on risk assessment.
Weigh the balance between their reliability, references, finances, business prospects, credit report, and background check to determine which potential tenant affords the least risk to the property. The lower the risk, the higher the return. Stick to this when making final decision in the screening process.
Regardless of the tenant that stands out in the end, remember this: If it seems too good to be true, it probably is! Any tenant that looks picture-perfect on paper is likely to have some hidden faults. Instead, seek clients that are honest about their failings but have clear information about why and how their business will succeed.
When their business succeeds, the landowner’s business does, too!
Eric Worral has owned and managed rentals for over 9 years. Currently, he works in marketing at RentPrep.com, a tenant screening service for landlords and property managers. He’s also the co-host of the “RentPrep for Landlords” podcast where he shares tips and insights on managing your rental properties.