If you are new to commercial leasing then the process can be slightly overwhelming. We get it and are here to help. This one part always seems to make potential tenants uneasy, confused, or worse, spooked… So here is the skinny on why landlords ask to see your financials, AND what they want to see, so you can set your business up for success to get that space LEASED.
Financials and Why They are Necessary To Screen Tenants
Residential Tenant Screening – Pretty Straightforward:
If you have ever rented an apartment, you are probably somewhat familiar with a standard tenant screening process. A residential landlord will likely run your credit report, ask for your driver’s license, and do a quick background check to make sure you are not a crazed criminal. Most of these application processes are fairly straightforward –
- Driver’s License or Identification
- Application Paperwork (Landlord Specific)
- Credit Score and/or Background Check*
*Half the time you don’t even know they are doing Step 3 because your permission for them was buried in the application paperwork. Tricky!
Easy 3 step process right? Tenant screening for a residential property is often pretty cut and dry.
PLUS: Your rights to lease residentially are protected under the The Fair Housing Act of 1968. The FHA, to date, includes seven protected classes: race, color, religion, national origin, sex, disability, and familial status.
Commercial Tenant Screening – Pretty Factored:
Commercial Landlords also need to screen potential tenants for their ability to pay rent and carry out their contractual obligations under a lease. Different businesses however are set up in different ways. They can have varied assets, structures, taxes, liabilities, insurances, and more. And there is not a federal law regulating commercial leasing discrimination. Because of these factors, there isn’t a one size fits all process for assessing potential tenants.
As a Landlord’s Representative, we are looking at many factors when screening a potential Commercial Tenant. Our duty to our Landlord is to ensure we get Quality Tenants – that add value to the property, pay rent, and have assurances that if they can’t, our Landlord isn’t in a pinch carrying unnecessary vacancy costs which can amount to 100’s of thousands of dollars in a short period of time. Some of our recommended processes for our Landlords include screenings for:
- Use Type
- Business Concept & Branding
- Tenant Mix and Non-Competes
- Business Class (Ie. Class A Space = High End or Luxury Type Tenants ONLY)
- Company Size and Structure – Corporate, Franchise, Small Business, Sole Proprietor, etc.
- Cash Flow & Profitability
- Assets & Liabilities – Business and/or Personal
- And Anything and Everything In Between as It Could Relate to a specific Landlord’s Risk
So what on earth does a Landlord need to see from a tenant?!? We get it. It’s confusing…. So below are the answers. Just one more reason to work with Southern Athena as your commercial real estate advisor. 😉
Business Financials for Commercial Leasing
So here are the Financials you should expect and have ready before looking at commercial space. Even if you only need to provide just one of these, having all of them will enable you to see the full picture of your business’s financial health and leverage your money moving forward with your space. The larger the financial commitment of your lease, the more financial screening that will likely take place. So if you are playing big, you may need all of these to get a deal done. Smaller leases with independent owners may only need one or two components.
– Profit and Loss Statement
A Profit and Loss statement, commonly referred to as a P&L, is often the most beneficial document to prepare for your business and present to a Landlord. Even if this is your first year in business, you can present a Projected P&L to demonstrate your budget, spending, and how you intend to make enough money to cover your rent. Rent for our Nashville Market should be around 10% – 15% of your Total Business Expenses conservatively, known as a Rent-to-Expense ratio.
We have seen up to 50% approved by Landlords in certain cases, but in general, those businesses have a hard time staying afloat in our competitive market. They are paying so much in rent that they become “lease poor” as they struggle to afford other important business expenses and initiatives like advertising, staff, or deferred maintenance.
Another metric to factor when looking at your lease is your Rent-to-Sales Ratio. Though different from Rent-to-Expense ratio, most successful businesses in our market fall within the 4-8% range. Ie. If you make 60,000 a month in sales before expenses, then your rent should be around $2,400 – $4,800 a month. The national ratio of 1.5-4% is HARD to find in our Nashville market!
Check out our editable Southern Athena Sample Retail P&L Worksheet as a great starting point of some of your P&L line items to consider.
– Previous Year’s Tax Returns
If you have been in business for a while then one easy way to provide tenant financials is to submit two years of previous tax returns. These should show that your business is legal and in good standing with the IRS. The tax returns do need to match the business entity that will be signing the lease.
Because most Agents and Landlords are not tax experts, this can be a quick way to provide information that checks a pre-screening box without opening your books. Even if your business is showing negligible profits or a loss from the first couple of years of business, that is okay.
The thought is often, “If it is good enough for the IRS, then it is good enough for us.”
Note on Sharing Taxes for Lease Deals: If you are doing anything funny with your taxes, or are nervous about sharing them, then you should definitely get everything approved and sorted out with your CPA and Attorney prior to sending to a 3rd party. Sharing this type of information could open you up to liability.
– Bank Statement Showing Cash Reserves, Assets and Liabilities
Many landlords will require a bank statement as their Preferred Landlord Financial Screening Method. Bank statements (or CPA statements) showing Assets and Liabilities are fairly common, easy to get your hands on, and straightforward. A veteran agent and Landlord can quickly check if the potential tenant has enough cash and/or assets to cover the monthly lease payments, AND the total lease value after accounting for Liabilities.
Unlike a Residential transaction, where a Landlord holds a deposit as security for rent and damage of a property, most Commercial Lease contracts also include language concerning what happens if a tenant experiences Default beyond not paying rent. These judgements can cover the entire value of the lease, meaning rent due over the lifetime of the lease would be due immediately upon default if things go south.
The Landlord and agent are looking at a bank statement or CPA statement to ensure the assets of a business, or person are somewhere to be found in the instance a business fails. If they are there, then game on!
– Lender References
Many Commercial Tenant Applications require 2 Lender References. Having go to connections with commercial bankers is paramount for any business regardless if you are actually using their lending or commercial banking services, or applying for a lease. These references establish credibility for your business because you have proactively sought out connections that can both aid and advance your profitability and financial leverage. Plus, the more people you know, the more they can help you.
Just like you want to start building credit early, well before embarking on a big purchase, you also want to familiarize your banking team with your goals, projections, and financial situation before embarking on a lease commitment. They can then advise you on the best route to take to leverage your current financial situation and options.
– Personal Guarantees
We have worked with a lot of clients and tenants that will not sign Personal Guarantees. It seems to be one of the most scary terms for a small business owner, right up there with bankruptcy. But it shouldn’t be. Personal Guarantees show a Landlord that you are fully vested and committed to your business and it’s success.
Someone who is willing to acknowledge that their personal finances are effected by their business has taken a more realistic look at their ENTIRE financial situation before making the decision to put it all on the line. It is undoubtedly a large risk if you don’t take the appropriate measures to weight out worst case scenarios, and what kind of safety nets or options are available in the event of failure.
Many Landlords require Personal Guarantees when the business is new, an unproven model or doesn’t have a proven track record of success. If your business is under 3 years old you will likely be asked to sign a personal guarantee as a requirement of your lease. This allows the Landlord to collect monies due beyond the protection of your business entity. The Landlord can collect from you, your home, your savings, retirement, etc. if your business doesn’t work. Just one more reason to be sure and,
“Always Figure out Your Financials First” – #SouthernAthenaTips
Want to Know More About Commercial Real Estate in Nashville?
We offer a variety of Commercial Real Estate Services in the Nashville area. We help Landlords screen tenant financials and all of those other bullet points we listed up there. The value we bring to a Leasing transaction exceeds our fees and the proof is in our numbers.
Contact Us Today to Learn More about how you can make more money #BuildingABeautifulSouth with Southern Athena.
We love our Featured Image by @rawpixel