Screening Tenants For Long Term Cash Flow Viability

Commercial property is all about the cash flow.

 

The cash flow is all driven by one thing… the commercial lease.

In Australia it’s a very powerful document. It’s almost as powerful as a mortgage and compared to a residential lease, a commercial lease tips the scales in favour of the landlord.

 

Residential leases benefit the tenant and I see residential landlords getting screwed all the time by dodgy tenants who decide that they don’t feel like paying the rent this month, or that it’s ok to trash a backyard or knock holes in the walls…

 

Yes, there are clauses in the lease that say they have to leave it in the condition they found it… but what’s the worse that can happen? They loose their bond… that’s about it…

 

And in the meantime the landlord’s got to take them to court to get them out … costing them money and time…

 

It can be a nightmare.

 

In a commercial lease there are many more rights given to the landlord so that as the owner of a commercial building you are protected.

 

So strong is the commercial lease that banks will even back it up by giving the landlord a bank guarantee at the expense of the tenant.

 

Should the tenant default on their rent the bank will pay you a lump sum which will cover the rent for a certain period of time while you find a new tenant.

 

It’s still a headache but at lease you’re covered.

 

And you get to kick them out very quickly and without any fuss.

 

Of course if you find a property which is untenanted or you are deciding whether to renew the lease with the tenant of a building you’ve just bought…

 

There are a few things you can do to investigate and screen tenants to make sure they are up to scratch.

 

Don’t let the idea that signing up a tenant… any tenant is going to be the answer to all your prayers. It’s better to take your time and it cost you a month or two’s rent than to get someone in who’s going to cause you trouble and headache down the track.

 

The right tenant is going to be a long term asset for you. I’ve had some tenants that have been in the same property for over 20 years and are a joy every month…

If you can get a tenant like this you’ll never regret taking your time checking them out properly before you offer them a lease.

 

Alternatively some landlords are too eager to close on a lease deal and then think about the deeper process of tenant placement later.

 

Tenants move premises and relocate for all types of reasons and it is wise to understand the real reasons behind every tenant placement.

 

Here are some of the most common:

 

  • Lease expiry elsewhere
  • Business liquidity
  • Needing more or less space to run the business
  • Difficulty with other landlords
  • Wanting to secure a lease rent free period to reduce cash flow and occupancy costs
  • Requiring better property improvements
  • Conflicting tenant mix
  • Warehousing or showroom needs
  • Aligning rent and occupancy charges to market
  • Change of business client base and sales systems
  • Staff and customer pressures on property use
  • Difficulties with other landlords, tenants, or agents

Without asking the right questions a new landlord considering a tenant could land in some difficult problems over time.

 

The first place to start if you are looking at a property that has existing tenants is to ask the managing agent about them.

 

It is hard and probably not the done thing but I’ve had one or two agents in my time let me look at the rental records to demonstrate whether they have paid on time over the time they have been in there.

 

It’s also worth providing a list of questions to each prospective tenant and get written answers back as part of an application or expressions of interest.

 

Here are a few questions to ask them:

 

  • What is the identity of the business?
  • Where have you traded before?
  • Why are you moving?
  • What is your budget for rent and outgoings?
  • What is the Corporate structure?
  • Where is the head office?
  • Who is in charge?
  • Can you give credit references?
  • What is the use that you will put the property to?
  • What is your business plan in this new location?
  • Who was your previous landlord or agent?

 

Good questions like these will help any landlord carefully consider a new tenant for potentially filling a vacancy for the long term.

 

Getting the real facts behind every lease negotiation and tenant change will save you a tonne of hard work and headache later on and hopefully land you a happy long-term tenant who will give you years of hassle free income and capital growth.