Small business tenants

[Adam Rothweiler]

I haven't yet pulled the trigger on a commercial property, I'm just spit balling. I hear a lot of great advice for screening tenants for rental properties wit SFR and MFR, but what kind of screening do you do for a small business looking to lease office/warehouse/work space?

[Joel Owens]

It's all about the guarantor on the lease, experience in that chosen industry, a track record of success, liquidity and net worth of the guarantor, and how easily attachable the assets are if something goes wrong.

For instance I would never front money for tenant improvements on a business that is not a proven performer. They could sign a 3 year lease and go out in year 1. That TI money is now gone that you fronted them. Better is to give a few months free rent and have them spend the money for TI's. Start their rent out higher so showing more income when you sell down the road.

Small businesses like to also try to get rent to increase every 3 to 5 years. So rent might go up 2% to 3% a year but they want to pay a rent bump of 6% in 3 years etc.

National tenants there is generally less risk in accepting these terms as they are likely to still be around and you see the increases. Mom and pop there is no way I agree to that. If they want a 5 year primary lease then the rent increases EVERY YEAR. This way if they go out in year 3 I have extracted every penny out of the lease possible.

Had I agreed to a 5 year with mom and pop and they went out in year 3 I never saw any income increase from them and the rent paid was being devalued each year to me with inflation ( example the same 100 paid was only worth 98 the following year ).