Investing in commercial real estate can be a profitable venture but, many times, investors acquiring property with an existing tenant base fail to fully assess the current occupants.
It is important to conduct the standard assessments inherent to purchasing a commercial rental property, such as lease terms, hidden rent reduction and operating costs. Understanding the financial details of the tenant base is often forgotten. The tenant’s ability to continue their lease into the future is critical to ensure your investment is profitable. This will allow you to properly evaluate the future income stream.
Unfortunately, a number of investors have learned the hard way, that while a commercial property ensures instant cash flow, it does not necessarily ensure the amount of income calculated.
While a tenant may appear to be reliable, showing an ability to make rental payments on time, this does not necessarily represent their ability to fulfill obligations moving forward.
Solely reviewing their payment history through receivables can fail to uncover a number of potential situations that could be indicative of future financial risks. For example, the tenant could have:
- outstanding legal actions, judgments and collections;
- delinquencies and monies owed for corporate, HST and employment related taxes;
- a history of delinquent payments and NSFs with other creditors;
- fraudulent activity with financial institutions;
- pending litigation in the Tax Court of Canada;
- a negative status with their professional accreditation;
- a canceled corporate registration with the Companies Branch or Corporate Tax Branch;
- or a changed legal company name due to an amendment or amalgamation.
Verify this information prior to acquiring an investment property with an existing tenant base. Ensure that you are not buying the burden of dealing with delinquent tenants and the need for sourcing new ones.
The best way to confirm you have gathered all the information you require to make the best decision possible is to use enhanced financial screening to review each of the existing tenants. This will allow you to properly assess the real value of the property, taking into consideration the future income stream.
A comprehensive Acquisition Report will offer details and insights that can be used in the decision-making process including:
- confirmation that the legal entity is registered, active and in good standing with Companies Branch and Corporate Tax Branch;
- verification with the Ministry that the existing tenant is registered and still operates under the same name that appears on the lease, revealing record of name changes, amalgamations, cancellations or wind downs;
- confirmation of banking relationships;
- confirmation of secured borrowing facilities, leases, credit lines and term loans;
- disclosure of negative information, including overdue payments, NSFs, collection claims, tax liens, legal actions, judgments, bankruptcies and pending Tax Court cases;
- historical look at QCR’s database and other creditor payment trends;
- confirmation of business affiliations and locations;
- verification of the status of Professional Accreditation;
- and confirmation of real property owned by the tenant, including mortgages and assessed value.
It is also important to note that Acquisition Reports on an existing tenant base can be completed without the knowledge or authorization of the commercial tenant. This is because Credit Reporting and Privacy Laws do not constrain investors from obtaining this information on commercial entities. All that is required is the name of the commercial tenant and the address of the building you are acquiring.
For more information on screening an existing tenant base for an investment building you are considering purchasing, contact us today.
Tags: Property Management