It has long been an accepted practice that a prospective Tenant should provide some financials for the prospective Landlord to review before finalizing a lease. This is simply good business practice especially if the prospective Landlord will need to spend a lot to fix up the space before the new Tenant moves in. Prospective Tenants are sometimes wary of this but actually this is good for all parties. It is miserable for everyone if the Landlord has to fight for their rent every month and no one wants to have legal battles or evictions if things are not working out.
Generally, these inquiries regarding financial stability have been one way. However in today's economy, the Tenants are not the only financial risk. Developers, which are often the owners of commercial buildings have been hit hard by the recession. Many have gone out of business and many who remain are hanging on by a thread. If a Condo Association is involved with the property, the Condo Association may also have financial risk.
Some of the problems associated with this may be minor. One Landlord having financial difficulties quit maintaining the landscaping and interior halls. The office building looked unkempt and made a bad impression. Others skimp on things like snow removal or maintaining the parking area. These things may go a while before being noticed. These problems may be annoying but are normally not critical issues.
Other problems can be real headaches. I have heard of Condo Associations with financial problems that decided to reduce their insurance. Later when there was problem, they did not have adequate coverage and the condo owners had a large assessment to cover the repairs. Another Landlord leasing 30,000 SF to an organization didn't have the money to maintain the building. This major Tenant ended up leaving because they were left with only one working bathroom for nearly 50 people. This cost the Landlord approximately $500,000 in rent per year because it didn't have enough money to fix the bathrooms.
In the most extreme case, the Landlord could go bankrupt and the property could be foreclosed upon. Should this happen, the outcome for the Tenants is uncertain. While there are some protections for the Tenants, no one wants to have to deal with these types of problems.
No matter what the issue, it is miserable for the Tenant to have to fight all the time to have the property maintained. So, it is also reasonable for a prospective Tenant to get assurances that their prospective Landlord is in good financial condition.
Presently, it is not widely accepted for the Tenant to ask the Landlord for provide financials for review. However, there are some things that you can reasonably do. Normally, I like to check public records to verify that the Landlord has paid their real estate taxes on the property, in full and on time. That is normally a very good indicator as to whether there is a problem. If the taxes have been paid and the property appears to be in good condition and well maintained, I might stop there. If however, things seem funny, I might investigate further to see if there are liens filed against the property. Finally, I might check to see if there are any pending legal actions filed against the property, which should let me know if a foreclosure action is in process.
Certainly, things can still fall between the cracks. You can do all of these checks and more and still have a problem that simply had not shown up yet. And of course, things can happen in the future that could not have been predicted. Still, hopefully, with a little due diligence, you can identify potential problems that exist currently and avoid getting into a bad situation. After all, it is certainly much easier for a Tenant to screen out a potentially bad Landlord than it is to try to deal with these frustrating issues after entering into a lease with them.
David W. McCoy is a Commercial Real Estate Broker from Louisville, Kentucky. David is licensed in Kentucky and Indiana and works with Office, Industrial, Retail and Land Properties. When David is not helping Buyers, Sellers, Landlords or Tenants, he may be running, scuba diving, biking, playing with his dogs or writing forCommercialLouisville.blogspot.com. If you would like some help with Commercial Real Estate, you can contact David at DMcCoy@ccre.biz
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