For those in acquisitions/capital markets, how are you underwriting small private tenants? What are you looking at specifically? Are you incorporating any custom quantitative models? Any materials/models you could point me too?
Background for question:
I work in NNN/NN retail/office development. Half of our tenants are small private firms or franchisee restaurants. Financials range from everything to financials with tax accounting basis to audited GAAP(ish) statements, sometimes new businesses. At minimum I'm trying to get a few years of P&L and Balance Sheet, then a bunch of follow-up questions to understand tenants operations/experience.
I'm trying to create a standardized process with simple quantitative aspect that my leasing team could use to do initial pass to even decide if they should be spending any time/resources before going down lease route. I'm thinking some simple financial metrics and a few subjective inputs to create a rating say 1-10. If the tenant is decent enough, I'm trying to adjust cap rate I'm underwriting up/down based on comps, say corporate tenant traded at 6% cap, this franchisee needs to be discounted 0.10 - 0.25% (I assign a cap rate to every tenant, to get weighted project cap rate for a direct cap development disposition).
I've read up quite a bit on S&P/Moody's methodology. Concepts are great, but with private companies, I'll never have that level of detail for inputs.
Thanks in advance for any thoughts, there's not exactly a right answer here.