"I am sick and tired of having tenants fail," yelled Mulroney at his property manager. "You need to do a better job screening those tenants," he exploded as he slammed the phone down.
"One more retail tenant bites the dust," he muttered under his breath. James Mulroney a real estate millionaire was frustrated. He worked hard with his property managers and leasing agents to select the best tenants for all of his properties.
He looked for strong anchor tenants to bring in the business and then he allocated a percentage of his spaces for restaurants, pet food stores, small ma and pop businesses mixed with national companies and medical tenants to round out his mix.
Usually he was pretty lucky … self-made luck. But this year at least two tenants had gone out of business in each of his centers. He knew the economy was tanking, but he had worked so hard to get to this point. His blood pressure was skyrocketing.
He was looking for a way to improve his odds in this game. His phone rang. On the other line was his favorite leasing agent, Colleen, with a potential tenant to back fill a space that had just vacated. Colleen was effervescing on the phone, positive and upbeat, she had wrangled a new tenant for the end cap at the High Street Center. "He is a cute, new young dentist" she bubbled, "I know he will do well and he is willing to pay the full rental price and sign a ten year lease if we pay for his tenant improvements."
Mulroney grumbled, "I have been losing tenants right and left, I need more help from you to better screen these tenants." Colleen said nothing. James continued "did you hear me?" Colleen answered, "Usually the owner makes the final decisions on his tenants, I have nothing to do with that." James gnashed his teeth and spat out, "Well, you will be helping me from now on. Let's strategize how we can do this better."
Ideas to improve tenant screening
He continued, "First of all I want you to get a financial report from each potential tenant, then I want to see a net worth statement, then I want to see how they have done in the past. Colleen just agreed with him to calm him down. Then Mulroney finished, "I would like to see a business plan outline for people that have never been in business before and have no track record."
Colleen gulped, "O.K. Mr. Mulroney, I will draft up some notes and visit with you tomorrow to review." James agreed and they set a meeting.
The next day Colleen started with a plan for a business plan outline,
"I think we should ask for information on the following items about the tenant and the business."
- Who will be the tenant and who will guarantee the lease?
- What is the tenant's background? Prepare a resume of experience.
- How does the tenant plan to operate his business?
- Who does the tenant imagine his customers will be (i.e. who is his target market)?
- Then the tenant needs to develop a first year operating budget to show the Landlord that he really will have the money to pay the rent.
Mulroney agreed.
Then she continued, I believe we will need the following :
- The tenant's and guarantor's authorization to get credit reports.
- The history of the company.
- A mission statement or a one sentence summary that describes the business.
- History of financial success over the last five years in the form of financial statements.
- A business and personal financial statement.
- Prior period tax returns for an existing business.
"Once we have approved all of these items, we can understand the tenant's ability to pay the rent, either from operations or personal assets, and if we are concerned about the tenant's ability to make it in business we can charge a greater security deposit in addition to the personal guarantee."
Mulroney agreed to that too, but then he quipped, "What about those regional companies that will not sign a personal guarantee, or those franchisees that are working on a corporate model?"
Colleen responded that "we might insist on a cosigner for the franchisees. The corporate businesses will not want to fight us in litigation. They have deeper pockets and will pay the rent until we find a new tenant or we buy them out of their lease."
"Colleen, those are good thoughts. Let's implement your plan and see if we can reduce our delinquency rate. I knew I could count on you." Mulroney complimented, "I will get on the horn right now to make sure that the property managers cooperate with you on this new plan.
And that is what they did and slowly, but consistently, Mulroney's tenant failure rate decreased.
Author: Clifford Hockley
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