How to do due diligence on an Office Tenant?

[Matt Liu]

I am looking seriously at a single tenant office building. The only problem is that the area is not very good, so ALL bets are on this one tenant (a non-profit that "helps provide services to more than 10000 people with special needs, their families, and seniors"). They do have a five year lease. But how can I verify that they are financially stable for the long-term? How can I investigate to see if their plans are to renew the lease? Should I call the director or the manager to see if I can interview them?

[Oren K.]

Matt Liu - Commercial leasing in many ways is not that different then residential. By that I mean, very generically, that you are providing specific space and services for a fixed amount of money over a period of time. As such, your interests are to secure the payments. If the lease holder does not pay, who can you look to (e.g. Guarantor?) for the payment.

To me financial statements are irrelevant unless they are a very large organization. A non-profit sinks or swims with their funding sources. If they don't get the grant they were expecting or a key contributor backs out, they are in trouble.

Effectively you are looking for stability, reliability and ultimately predictability of the funding sources.

Here are some / type questions I would be asking:
- Is funding primarily from one source or multiple?
- Does it come from governments or individuals?
- What is their track record in attracting funding?
- Is there a personal guarantor (with assets)?
- How far in advance is funding committed.
- IF they can not make rent, are you prepared to terminate their lease?
- How long will it take to fill the space and at what rate?
- Can you carry the investment while looking for tenants?