Vetting Commercial Tenants

[Casey Miles]

How do you guys vet your prospective commercial tenants? Do you use a service? I have a small local wellness center interested in a space I have. I assume they have an LLC. I just recently bought the property and my experience in vetting tenants is purely residential. I assume you do credit, criminal and eviction on the partners? What if it was a larger tenant? Surely a large business has no interest in having to have their partners guarantee the lease?

Thanks in advance,

Casey

[Joel Owens]

Mom and pop tenants typically you do not want to give hardly any TI and do months of free rent instead. This way if they do not survive the primary term you are not out usually a bunch of money. If there is a leasing broker make sure they get paid as you go with the tenant or you could be out a lot of money. You could also put a trigger in for a 5 year primary term lease and the tenant rep broker gets paid for year 1 but certain hurdles have to be met for the tenant (payments on time etc.) before the landlord pays the remaining 4 years of expected leasing commissions to the leasing broker.

Leasing broker will want commission all right away but with mom and pop tenants if you pay LC all upfront and TI you can be out a lot of money if they fail. Leasing broker will say it is landlord's risk to take so pay them their money etc. but that is a cop out. If landlord is renting a hard to fill space in a center then yes maybe back fill it with a weak tenant as it is not generating revenue anyways so just a bonus.

Look at liquidity and net worth of tenant personally to be able to feed the business if it is not profitable or just slightly and needs capital infusions to stay afloat. Personal guarantees are a given as LLC's can be bankrupted easily. If guarantor is weak signing the lease have others added like family,friends etc. that are much stronger in liquidity and net worth be on the hook as well.

When it is not just the guarantor failing and others have consequences then it is harder for the tenant to quit and walk away. Some can deal with shaming themselves and failing but not bringing others down with them etc.

Have in the lease that you can move the tenant to another space etc. This is beneficial say if a mom and pop tenant is given premium space in a retail center but later on a national tenant comes knocking and will only go in if they get that space. You want flexibility to move the existing tenant to a different  space to put in a national tenant. National tenants for mix generally increase the value of the property and lower the cap rate you could sell for.