Hi,

I have recently bought a commercial property and am currently looking for tenants. Unfortunately, the only company interested in renting the offices so far looks a little shaky to me and I am worried that they might go bankrupt over the course of the lease. Is there any good way in which I can protect myself against this credit risk of my tenants? If you were to lease to someone who looks like bad credit, how would you determine how much more rent to charge to compensate for the risk?

Help is much appreciated.

This might be an unpopluar comment, but "Life Happens."

You can't protect against everything, though I am sure some insurance guru would beg to differ.

I think you hit the nail on the head with charging more rent. That is the basic element of risk-to-reward ratio. You will have to sell it to your client as to why you are charging more than the going rate.

Good luck.

__________________
R,
David Phillips
A Marietta Real Estate Agent, 678-521-4680
The Georgia Mortgage Broker, 678-370-0190

And a large deposit!

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Ron Goodman, GRI, REALTOR®
Prudential Colorado Real Estate
Denver Colorado Real Estate: Highlands Ranch, Parker, Littleton, Castle Rock
Adwords for Real Estate: PPC Setup Services & Consulting

You can try to get a more accurate picture of their financial situation:
Ask for tax returns, pull their credit score, get a financial statement, letter of credit, etc.


That way, you at least know what you are dealing with - rather than speculating on what someone may or may not be.


After going over that information, you should then be able to make a reasonable decision on should you lease to them, how much to charge, how large of a deposit, etc.

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Jennifer Karlen & Jon Karlen
Kentucky Horse Farms - Louisville Kentucky Real Estate - Lexington Kentucky Real Estate
Serving the Louisville KY metropolitan area including Jefferson County - Prospect Shelby County - Shelbyville Oldham County - Goshen, La Grange and the Lexington KY metropolitan area including Fayette County - Lexington Woodford County - Versailles Scott County - Georgetown Jessamine County - Nicholasville

a large deposit is the best way to go, if you ask for e.g. six months' deposit, in that time they might sort out their problems or you'd have found a new tenant..

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Bad Credit history not such a problem with mortgages:
mortgages for people with bad credit, bad credit mortgage and IVA mortgage

I agree, get as much of a deposit from them as you can.

Are they asking for some unusual tenant improvments? If so you can add the costs of that to the deposit to protect yourself. For a brand new or shaky businesses some commercial owners will require several month's rent, the cost of the TI they want, and the broker's commissions as as deposit. That way they are totally covered if the tenant doesn't make it.

If they don't need any build out or improvements that is a plus, if they do make sure it is suitable for other business that you could lease to down the road. If they want some odd layout then you may have to tear it all down in six months.

Also consider the flip side - is the space vacant right now? how much longer will it take to find a better tenant? how much will that cost in lost rental income? Good luck!

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Jim Olenbush, ABR, CRS, GRI
Broker / Realtor

Austin Real Estate