Creditworthy corporations are financially strong because they usually operate by low-risk investment-grade ratings.
These corporations only consider “investment-grade” tenants, since they tend to have the most stable financials. It’s pretty easy to grasp, actually. The higher the credit rating, the more stable the company.
Now, when it comes to NNN lease tenants, most of them will have high ratings and corporate-guaranteed leases, but buyers are still on alert!
Assessment Of Tenant Financials
There are many reasons you need to scrutinize a tenant.
Sometimes, a small transaction could be enough reason for the investment to be sizable, and the investment committee might not be required to uphold the analysis.
In many situations, a parent is offering a guarantee, so the credit of that entity needs to be examined.
It is just as important to ensure that the tenants are creditworthy by performing a thorough assessment of tenant financials.
Evaluating Creditworthiness In Five Steps (Questions)
As with anything in life, in the real estate leasing process, there are no foolproof strategies to make a good tenant financial examination or credit rating decisions.
Despite this lack of a credible rating process, landlords seem to successfully execute leases with nonrated tenants every day.
In fact, tenants like this make up the vast majority of commercial leasing tenants. They pay their rent on time and uphold all of their lease obligations throughout the lease term.
On the other side, many tenants whose financial statements show large net value, fill bankruptcy courts for not being able to pay their bills.
For this reason, net worth is just one consideration in evaluating tenant financials and credit ratings. As part of determining tenant creditworthiness, the process is based on five factors:
- A review of financial records: tax returns, balance sheets, income statements, etc.
- Payment track record: Does the tenant pay its bills fully and on time?
- Rental history: Did the tenant keep its previous space in good condition; Its relationship with neighbors; Reasons for leaving the previous location, etc.
- Assessment of the industry: Thriving and industries that are more sought after have more chances to succeed.
- Tenant attitude: Tenant’s reasons for choosing this new property and location, etc.
1. Tenant Financials Review Via Verbal Discussion
A simple talk can provide a quick and inexpensive “read” on a company’s or tenants’ financial condition.
IPG serves you as a second pair of eyes and years in reviewing financial statements (public or private), looking for anomalies as hints at financial problems.
This enables our clients to take advantage of our familiarity with markets, and ability to quickly recognize potential areas of financial and real estate risks.
2. Tenant Credit Ratings Snapshot
While somewhat cursory, this step is designed to inspect tenants via square footage. Our analysis includes a review of financial statements that are typically internally generated. The goal is to highlight any areas of obvious financial weakness that might exist.
3. Tenant Credit Ratings Review
A tenant credit rating review is an in-depth review of a tenant’s financials over a 3-to 4-year period. The emphasis is usually on understanding long-term trends like:
- Revenue growth
- Profit margins
- Overhead factors
- Cash flow
- Balance sheet accounts
- Debt coverage ratios
- Overall capitalization, etc.
The report includes a detailed observation about the tenant’s financial strengths and weaknesses, with summarized company’s key financial statistics and trends over a multiple-year period.
4. Tenant Credit Ratings Report
Tenant Credit Report that presents a comprehensive assessment of the risks involved in a particular tenant transaction.
This is the most rigorous level of tenant scrutiny and the one that will provide the highest degree of certainty about the level of tenant risk involved in a lease.
5. Guarantor (Parent) Financial Review
In many cases, the analysis of guarantor financials and credit ratings becomes the primary focus in determining the level of risk in a leasing transaction.
This is particularly important in situations where the credit of the actual tenant is weak, and a financially strong parent or partner becomes a necessary requirement to completing a lease negotiation.
Choosing Investment-Grade Tenants & Creditworthy Franchisees
While there is no such thing as a “risk-free” investment, choosing a NNN lease property with an investment-grade corporate tenant or a creditworthy franchise tenant is typically better because it provides:
- Reliable and lower-risk investment
- Steady monthly income
- Little to no responsibility (while at the same time meeting your financial and lifestyle expectations)
To be able to determine the creditworthiness of your next NNN tenant, connect with IPG advisors. We will walk you through the entire process; from the property search to closing the deal.
Working with a knowledgeable counselor saves you time and the possibility of making a costly mistake. Contact us today for your consultation.
