Landlords review tenants’ financial statements to measure risk before entering a lease transaction. Historically, financial information has typically flowed in one direction. Current market conditions have created a new question for tenants, “What is the financial strength of my landlord?”
A landlord’s financial challenges can affect tenants in several ways but typically a delay or failure to make necessary repairs to the property is the most common. The issue is particularly critical at lease signing or renewal when tenant improvements are involved. The cost of the tenant improvements is usually funded to a large extent by the landlord. At the time these checks are written, the tenant has already signed the lease and there’s no time to find an alternative location.
Tenants can minimize their exposure to under capitalized landlords by doing some homework before entering or renewing their lease. The use of a good tenant broker is the first step, as they have constant interaction with all major landlords in their market. Tenant brokers’ fees are paid by landlords so it’s in their interest to research financial solvency. As an intermediary, the tenant’s broker can ask the “hard questions” about the source of funds, debt structure, and overall financial strength of the landlord.
The majority of landlords have the capital necessary to continue their operations through the down cycle. However, savvy tenants will conduct their own due diligence to ensure that the landlord is capable of fulfilling their lease obligations for the long term.