In today’s tumultuous economic times, landlords need to accurately determine the creditworthiness and risk profile of new and existing tenants. Whose responsibility is it to make such a determination…the landlord or the tenant’s broker?
In previous blog posts I’ve discussed the issue of landlords seeking to pay commissions at rates and on terms deemed to be less than favorable by many brokers, especially when those landlords perceive tenants as not being creditworthy. A reader commented that, as part of the reason for receiving commissions, commercial real estate brokers should be responsible for evaluating the creditworthiness of the tenants they represent. At first, I was a bit surprised by that one. Given that this particular reader was from an institutional type of commercial landlord, I understood his mindset, nonetheless.
The reader’s desire was to secure third-party analyses of the creditworthiness of prospective tenants for his buildings. However, his idea of forcing that responsibility onto commercial real estate brokers is a dangerous one. Real estate brokers as credit analysts? Moreover, I saw his comment as a landlord’s desire to transfer its obligations and risk to another party. Of course, if a broker were to take on such a responsibility, you can bet your hat that a landlord would also place the liability of accuracy on the broker, too!
So, should commercial real estate brokers be responsible to validate their tenants’ creditworthiness? Here’s a better question:
Are commercial real estate brokers QUALIFIED to evaluate their tenants’ creditworthiness, financial viability, risk, and ability to perform under their leases?
Credit analysis is not an easy task, especially when it comes to privately-held and private equity owned portfolio companies. But, brokers as credit analysts? Placing such an important component of deal making as risk analysis in the hands of commercial real estate brokers would be an extremely dangerous move for all involved, and would not likely minimize risk for landlord or tenant.
There exists an entire industry dedicated to analyzing companies and their ability to sustain and perform their financial obligations. Perhaps landlords should rely on these qualified independent third parties to analyze the credit of prospective tenants. Those experts are versed and capable of conducting such risk based assessments and properly reporting their results.
New insurance based third-party analysis and credit guarantee products are beginning to emerge in the marketplace as a means of evaluating tenant creditworthiness. These combination services and products promise to provide commercial landlords with the qualified risk analysis they desire along with alternatives to security deposits and guarantees.
Demanding third party credit and risk analyses can be a slippery slope for landlords, as tenants may demand similar analyses of landlord creditworthiness. This could pose particular challenges for landlords, given the financial struggles that many landlords are experiencing in the current economic climate.
So, should landlords be entitled to accurate assessments of tenants’ risk before entering into transactions? You bet! With an entire financial services industry dedicated to risk analysis, should commercial brokers provide such services? Absolutely not!
What do you think?
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Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to finance and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew Zezas, RealStrat’s clients engage the firm when acquiring, disposing of, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.
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