Great question. I'd love to hear thoughts from others but here's my quick .02 coming from a CMBS background. For me, analysis of a tenant's credit is a two part equation.

First, I'm trying to satisfy the formal definition of credit - what's the tenant's financial standing? Unless it's a publicly traded entity with corporate credit ratings you can fall back on, you'll probably want financial statements for whatever entity is on the hook for the lease so you can do traditional corporate credit analysis per JimboUSC, if that's your thing. I imagine the amount of analysis you do will correlate to how much exposure your property/portfolio has to this tenant and will probably also reflect the general underwriting culture of your shop. Also, important to note is who's actually on the dotted line on the lease. If it's a subsidiary, it may be that your recourse as landlord or first lien stops before we get to the parent so be careful with that - you don't want to give credit where credit isn't due - make sure you're looking at the right set of financial statements.

Second, and this is where the phrase "tenant credit" tends to get conflated with traditional corporate credit analysis - I would analyze a tenant's "credit" as relates to the property, or rather "how badly do they want to be here" analysis (and you should be doing this whether or not your shop has corporate credit analysts to do the first part above for you). How long have they been at the property? How many times have they renewed? Do they have termination options and what does that say? How much $ have they put into their space over the years? When did they last put $ in? How integral is this location to their operations? How well are they utilizing their space? Have they outgrown it? Are they shrinking their staff at this location? Do they have other offices/locations in the immediate area... that are newer, older, better, shittier? If it's retail, what are their sales? Total and PSF? How are these trending? How do they compare to the national average (total and PSF)? What's their occupancy cost? Is their store format in line with their current "standard"? How does this store rank to their other stores in the region?

 

I'd want to do a deep dive into their business model and income projections to see if they meshed with the surrounding trade area and actual demand for their services so that I could look at a health-ratio.

I come from down in the valley, where mister when you're young, they bring you up to do like your daddy done
 

Would take a look at the tenants ability to cover rent. Fixed charge coverage ratio is important. You can also look at their debt/EBITDA to compare to industry peers to see how well they operate relatively. At the end of the day you need to understand the industry they operate in and their need to exist in that industry, especially when analyzing companies on a long term lease. Another factor that is extremely important is the mission criticality of the facility that you are looking at (i.e. is this facility integral to their ongoing operations). If your facility is critical and the company is healthy, then they will probably be able to pay your rent.

 

we usually look for LOC or guaranty without cross-collateralization. corporate guaranty is OK depending on balance sheet.

if you're dealing with a small tenant who can't secure these instruments, then you need to focus solely on their business fundamentals, sometimes worth the additional risk, but in those situations i reach out to people who know something about the tenant's industry for neutral feedback.

 

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