You likely understand the importance of screening potential tenants for a residence, but many landlords don’t realize they should also be screening commercial tenants. Although it may seem like (as business owners themselves) commercial tenants would be more responsible tenants than residential tenants, this isn’t always the case. Unfortunately, there is still risk involved with any tenancy and if you’re not diligent, you could end up with a commercial tenant who refuses to pay rent on time or simply doesn’t take good care of your property.
By screening potential commercial tenants, you can better determine whether they’re a good fit for your commercial space. TSCI’s CommercialConnect offers comprehensive commercial tenant screening, including a company credit report, the signer’s credit report, and a national criminal background check. Keep in mind that the following is for informational purposes only and is not intended as legal or financial advice. Laws regarding tenant screening can vary depending on your location.
Steps to Take When Selecting Commercial Tenants
- Interview potential tenants
Although some tenancies can work out well without meeting the lessee in person, it’s always a good idea to meet and interview your potential tenants. This can be done in person or in a virtual meeting. Some topics to inquire about include:
- Income
- Employment
- Criminal background
- Previous evictions
- Rental history
Although this is all information you’ll receive on a commercial tenant screening report, it’s essentially a pre-screening step that can help you determine whether the tenant meets your basic criteria before moving forward.
- The Application Process
If the interview goes well, the next step is to have the tenant fill out a commercial rental application. This will help you collect pertinent information about the prospective tenant. Typically, the rental application should include:
- The legal business owner and company name
- Date the business was established
- Type of business
- Rental history
- Financial information
It’s also recommended to ask about the potential customers who will be visiting the space; if the business is already an established one, you may always want to ask to see financial statements to ensure the company is a viable one. If the company is a start-up, consider asking to see its business plan and names of their guarantors.
- Evaluate the Terms of the Lease
Even though things can change quickly in the business world, most commercial tenants will know whether they’re interested in a short-term or long-term lease. Although most landlords prefer long-term leases, there are many reasons why a potential tenant may request a month-to-month lease or a 1-year lease. Either way, determining the leasing terms upfront is an important step before deciding whether the tenant is a good fit.
- Check for Guarantors
Many businesses have financial backers who can serve as lease guarantors should the business owner be forced to default on their tenancy. If this is a new business, guarantors can be especially valuable. If the tenant has multiple guarantors, this shows they’ll have adequate financial support in case the market or economy changes or their business struggles to find ground. If the applicant doesn’t have guarantors, it’s even more important to pay close attention to the company’s business model, financial projections, and screening report to determine whether they’d be a risk.
- Conduct a Commercial Tenant Screening
If the prospective tenant has met all your criteria so far, the next step is to conduct a thorough tenant screening. Using TSCI’s CommercialConnect will reveal everything you need to know about the tenant, including the signers:
- Financial summary
- Credit score
- Balances
- Credit lines
- Prior inquiries
- Public records
- Employment and address history
You’ll also receive in-depth and important information about the financial state of the business, including red flags like:
- UCC (Uniform Commercial Code) Filings: These determine whether the lender has an interest or lien against an asset being used to secure financing—which can increase their overall credit risk and scoring.
- Bankruptcy: Bankruptcies are a sign that a business no longer has the sufficient cash flow to pay its debts or operate its companies.
- Collections: Creditors often turn to collection agencies after multiple failed attempts to collect the debts they’re owed.
- Credit Limit Recommendations: This is the maximum amount of money a lender will allow the business to borrow while using credit cards or its line of credit.
- Judgment Filing: Judgment filings are court decisions that have been entered into the public record. If a judgement is entered against a business, debt collectors have more tools at their disposal for collecting the debt, like garnishing income or bank accounts.
If allowed in your area, you may also want to conduct a national criminal check, which will show:
- Felonies
- Misdemeanors
- Sex offender status
- Other convictions at the state and federal levels
- Evictions
Ideally, the tenant’s screening report will be free of red flags, with a good rental history, excellent credit score, and other signs of financial stability and responsibility.
- Make a Final Risk Assessment
If you have more than one prospective tenant, you should conduct a final risk assessment to determine which is the best candidate. You’ll want to weigh factors like references, credit scores, reliability, and results of the background check. Stay objective through the process and consider the interviews as well as the screening reports.
With commercial real estate in high demand, there are likely to be several tenants interested in renting your space. Make sure you’re taking the time you need to screen each applicant thoroughly. CommercialConnect is specifically designed for commercial landlords and screens both businesses and the lease signer for only $75.00. You also have the option of adding on a national criminal background check. Our screening reports are fast, easy to use, and available online 24/7. If you have any questions, feel free to call us at 1-800-523-2381 or fill out our online form.
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