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Who Makes The Best Commercial Tenant For Your Retail Premises?

Ranjan Bhattacharya, commercial property investor and developer, comments

When letting out a residential property, landlords take a keen interest in the financial strength of their potential tenant. Do they have a job? How much do they earn? Is their job full-time, part-time, a zero hours contract or on a self-employed basis? The landlord will use the answers to these questions to evaluate the financial strength of a potential residential tenant and whether they can afford to commit to paying the rent on a regular monthly basis. Landlords also often make subjective judgments of a tenant’s financial strength based on who they are employed by. For example, if they are employed by a large recognisable company, then the tenant is considered, rightly or wrongly, to have a better job.

In the commercial property world, we use the phrase covenant strength when referring to the financial strength of a potential commercial tenant. Covenant strength is about the financial strength of the business that will trade from the commercial premises.

Commercial landlords will look at the company’s accounts and seek credit reports from agencies like Dun & Bradstreet. However, the company accounts you will see will always be out of date with respect to reflecting their current trading position.

With prospective residential tenants, a landlord can ask for recent payslips or copies of bank statements to easily verify their current employment income. But getting a look at a company’s current trading position is not so easy. So, landlords must take a view based on the information that they have.

Hence conventional wisdom equates strong covenant strength with a big blue-chip company and weaker covenant strength with a small independent trader.

Essentially, this is because a large company will have years of accounts that show their annual turnover and profits are huge in comparison to your annual rent. So, just as residential landlords equate tenants working for a big brand employer as being better potential tenants; commercial landlords regard big brand company’s as being better commercial tenants.

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