Buying a Tenanted Commercial Property? Why it’s Critical to Conduct a Tenant and Business Analysis
When considering purchasing a commercial property, it is important to consider the tenant and their business. After all, the profitability of the investment depends on who you are leasing the property to.
The goal should be to secure a tenant that is going to provide stability to your investment. You want to avoid having to constantly cycle through different tenants.
So, another part of your due diligence would be analysing the tenant and their business to help you to understand whether they are likely to be a good fit for the property and if they’re going to stick around for a while.
Here are some key considerations you should factor into your due diligence process when it comes to finding the right tenant for your commercial property.
What Does a Tenant Analysis Entail?
Any good investor knows that due diligence is key when considering any commercial real estate purchase, but it is especially important when the property in question is already leased. It’s essential to conduct a thorough tenant analysis before signing on the dotted line.
Firstly, I’d recommend speaking directly to the tenant as early in the piece as possible, as this will give you a much broader insight into the lease arrangement. You are entitled to do this as part of your due diligence process, and a real estate agent can’t really tell you otherwise.
I’d also advise against signing any kind of NDA (non-disclosure agreements) that prevents you from speaking to the tenant.
The Tenant Analysis Checklist
If you're looking to gauge the longevity of the area and the tenant, you should include the following questions as part of your tenant analysis:
Have you been told the property is for sale?
Is your business doing well?
Have you considered buying the building yourself?
Who owns the business?
How long have you been there?
How many staff do you have?
Are there any rent abatements (discounts applied during slow periods of trade)?
Does the business have multiple locations?
Where do you want your business to be or what do you want it to look like in the next 10 years?
Would you sign a longer lease if I bought the property? (This will indicate the tenant’s commitment and give them some assurance that they won’t be evicted.)
When does the business operate?
Are there any outstanding issues or maintenance problems?
Are there any things you’d like to do to this property or the complex?
What’s your relationship like with the nearby tenants? And are there any competitors in the area?
Do you see any future issues with your industry?
What demographic of people usually comes to these premises? And how do most customers get to your premises?
Is there enough parking?
Are there any other available properties that are similar to this?
Do you know how long the other tenants have been here?
Who owns the fit-out? (Banks don’t usually include the fit-outs in their valuations.)
Conducting a Business Analysis
When you buy a commercial property that’s already leased, you are effectively buying into the tenant’s business and its future. As such, it’s essential that you do your due diligence and carefully analyse the business before making any purchase.
First, consider the nature of the business and its ability to generate revenue. Does it have a solid track record? Is it in a growth industry? Are there any potential disruptors on the horizon? Next, take a close look at the financials. How much revenue does the business generate? What are its expenses? Is it profitable?
Finally, assess the quality of the lease agreement. How long is the lease term? Are there any restrictions on use? Is the rent reasonable?
By thoroughly evaluating all of these factors, you can make an informed decision about whether or not to buy a commercial property that’s already tenanted .
The Business Analysis Checklist
To help you identify all of the above information, here are a few questions you should consider adding to your business analysis checklist:
How busy is the business?
How long has the business been running? It's ideal to find a tenant who has been in the property for more than five years—their business will have established itself and be beyond the typical failure period of three years.
Is the business owner the occupier? The success of their business depends on their personal wealth, so they tend to show more care. On the other hand, business investors show less loyalty and less concern for their investments.
Beyond the current status of the business, you’ll need to consider the impact of rapid technological growth on the business. It can either make or break a business’s success. For example, streaming services completely wiped out video stores.
The shift online means that many types of retail stores are closing, and others are struggling. So this needs to be a major consideration when assessing the future of the tenant’s business in providing you with a stable income source.
Other Due Diligence Considerations
Beyond analysing the tenant and their business, you also need to conduct a lease review as well as a body corporate review if you’re buying a strata-titled commercial property.
If you’re interested in finding out more about this part of the commercial property due diligence process, make sure to check out my book, Commercial Property Investing Explained Simply, where I break down how to find the best property, do the due diligence, manage tenants, and much more.
Key Takeaways
When considering the purchase of a commercial property that is already leased, it is essential to conduct a thorough tenant and business analysis. This will help to ensure that the property is a good fit for your investment goals and that the current tenants are well-suited to the space.
Some factors to consider as part of the analysis include the financial stability of the tenant businesses, their length of occupancy, and any plans they have for expansion or contraction in the future.
By taking the time to conduct careful due diligence on the existing tenant and their business, you can avoid costly mistakes and ensure that your commercial property investment is a success.
If you would like to know more about how I have helped thousands of clients successfully source and purchase quality commercial property across the country, get in touch today.