Due Diligence is the disciplined process you use to lower the risk of investing in Commercial Property. This risk generally comes in four “flavors” when you are investing in Commercial Real Estate.
Market Risk: Will the fundamental conditions of this market permit me to meet my return on investment (ROI) goals?
Financial/Performance Risk: Does the projected financial performance of this property meet my ROI objectives
Tenant Risk: Will these Tenants enable me to meet my ROI objectives?
Physical Risk: Will the physical structure of this property support my ROI objectives?
The third region of risk … Tenant Risk … deserves unique attention when you are getting Retail, Office and Industrial Properties. These property types carry an additional layer of risk you don’t see in Multifamily because your Tenants aren’t just living in your building … they are performing organization within your Property.
Their capacity to pay your rent is predicated upon the health of their company and not just on their ability to draw a paycheck.
In order to lower your Tenant Risk you must recognize the nature and strength of the companies of each of your Tenants.
Where in Multifamily you may possibly stop at reviewing the Tenant’s background check and payment history … in Retail, Office and Industrial you have to go further and really study the viability of each Tenant’s organization. This has by no means been more crucial than in today’s economy.
No matter what your Lease says, if your Tenant goes out of organization, you will have a vacancy to deal with.
Researching your Tenant’s Company has numerous steps …
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1) Begin with researching the businesses on the Web.
a) Location the entire enterprise name in quotations (like this: “International Outfitters”) and search on Google. See what shows up.
b) If the company is publicly traded, study their stock costs, analyst opinions and earnings projections. Call the corporate office and see what their plans are for this branch.
c) Do the same factor with the names of the owners and CEOs. Google them in quotes again … like this … “John Doe”
2) Ask each Tenant for current Financial Statements and analyze those carefully to get an notion of the business’ recent and past financial performance. You may not be able to get financials for a private enterprise owner and you can constantly ask. What trends do you see in the financials in the last 6 -9 months?
three) Call each business Owner/Manager and arrange a sit down, face-to-face interview.
One logical time to ask for this interview is when it’s time to go over the Estoppel Letter and confirm its contents. Whilst you’re discussing the Estoppel Letter, you can question them about:
The strength of their organization
Their outlook for future enterprise
The challenges they see on the horizon
How you may well aid them improve their business when you take over as their landlord
Make note of any concerns you have about the enterprise strength of any of your Tenants.
4) Sit down with your team and discuss methods you could assist the enterprise of your present Tenants and mitigate against the loss of any of your weaker Tenants. The goals here are to assist when you can and have contingency plans in case any of your weaker Tenants goes out of company.
Identify the businesses with the highest risk of failure and make sure you and your team know what you’re going to do if they truly do cease to be 1 of your Tenants. AND make sure you develop proformas with and with out the income from your weaker Tenants.
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You ought to perform these particular Tenant Due Diligence steps at the exact same time as you are completing the activities of Marketplace, Financial and Physical Due Diligence for one basic reason …
You could be in the finest property, in the most stable marketplace with a glowing Proforma … and if your Tenant’s enterprise falls apart … you will potentially lose funds. Take the steps we have outlined here and you will significantly reduce this Tenant specific risk.
AND by no means be afraid to walk from a deal if the Seller is not willing to discount the property since of Tenants at high risk of business failure.