It may seem obvious, but letting a commercial property is one of the primary ways you can add value to your investments. However, it’s not always as straightforward as it may seem. The occupier market is getting tougher as economic conditions worsen, and you will need to understand how to secure the best tenants possible in order to remain competitive.

At this point, it’s worth recapping how letting a commercial property can enhance capital value. Simplistically, you can calculate commercial value by dividing the rent by the yield. It’s therefore a simple equation - every time you add rent (income) to a property, the higher the capital value will become. The yield is the multiplier that you apply to the rental, and even this is affected by the quality of the tenant leasing the property, the lease under which they are occupying, and the rent they are paying.  

Valuation is an art and not a science. When a valuer rocks up to your property they will be weighing up all the risks associated with it and will reflect that in the yield - it is no coincidence that the yield is often called the “all risks yield”. Valuers will consider the property’s location, size and configuration as well as the length of the current lease, lease terms, rent, and the tenant covenant. As a result, if a property is vacant, it is often considered as being more risky.

Tenant covenant relates to the relative probability that the tenant will be around long enough to continue to pay the rent for the lease term (and beyond) in order to mitigate the chance of a vacancy in the future.

So how can you check the tenant covenants? Well, first off, I would recommend that you ask for the business’ last three years’ accounts and get your accountant to check these out. You can also use credit check agencies such as Dunn and Bradstreet and Experian, amongst others, to do a similar job. Many tenants’ filed accounts can be up to a year out of date so I would recommend that you use all means available to check out the tenants – speak to commercial agents who know them well, Google them and find out what other lease liabilities they have (through Nimbus Maps and similar). For smaller businesses it’s also useful to ask for references.