Commercial real estate tenant screening is a complex process that requires thoughtful planning. This is one of the reasons CRE brokers are responsible for advising seasoned veterans and new owners on the best ways to rent out spaces to commercial tenants.
Unlike choosing residential tenants, choosing commercial tenants requires a more thorough screening process. Here are key things all CRE brokers should consider during tenant screening:
It’s almost certain that you and your client will have some gut reactions to some of the potential tenants that come your way. In whatever you do, don’t let your emotions get in the way.
Instead, your decision should always be based on risk assessment. You’ll have to weigh each potential tenant carefully considering credit reports, business prospects, references, finances, background checks, reliability, etc. to figure out which potential tenant poses the least risk to your property. In commercial real estate, the higher the risk, the lower the return. Keep this in mind when you’re making the final decision on which potential tenant to choose.
Tenant screening may seem like a daunting task, but in today’s tech world, several tools exist to simplify the tenant screening process. A quick search can open you to a world CRE tools that provide background checks, previous rental data and credit reports.
These tools can save you time and resources, and ensure you choose a potential tenant that won’t pose a risk to the property. Be sure to take advantage of these tools designed specifically to screen your tenant. Fewer tenant screening tasks for owners and brokers makes the whole tenant screening process less frustrating and more efficient.
Potential CRE tenants often have a lease length in mind—another aspect to look at during the tenant screening process. More often than not, landlords expect longer leases because they are considered a more financially secure commitment. But if a potential tenant suggests a one- or two-year lease, you should do all you can to find out why.
The potential tenant could be a startup that is looking to scale quickly or a government contract granting funds with a limited lease lifespan. On the other hand, the short lease may be a clear indication of financial instability down the road. Once you figure out why the tenant wants a shorter lease, you’ll be able to decide if it’s the right tenant for your space or not.
Potential tenants looking to lease a commercial real estate space must prove they have financial support. If the tenant can only vouch for themselves as a financial guarantor, the landlord and broker should evaluate if that is enough collateral. Look closely at the tenant’s business model and financial projections to see if the business poses a long-term risk for the property.
Ideal tenants would have multiple financial backers in case of market changes or economic collapse. If they were to default on their lease, the landlord may still recover money lost as a result of unpaid rent or other costs incurred by a default business tenant.
The perfect tenant does not exist, but you can find a tenant that matches your expectations by assessing risk, lease terms and financial backing. By conducting a thorough tenant screening, you can help your client find a tenant that will best fill their space.