Credit is Still Important

1. Credit is Still Important;but Should Carry Less Weight in Making Decisions

This is part of a series that is being posted to my website because blogs read backwards and this item needs to read forward. You may read everything published to-date at http://www.segrestrealty.com Hit the “Investment Guidelines” link.

It is still extremely important to check out tenants and developers and contractors well before doing business with them Investors often select properties based on the rating of the tenant. This is a big factor in determining the cap rate at which the property sells. The weight given to this factor needs to be reduced. We have seen that even banks and automobile companies can go broke.

Often leases to franchises are guaranteed by the franchisor. Retail companies frequently have excellent credit and reputations; but if Santa Claus doesn’t come or if he doesn’t bring enough revenue even the best retailers may go into receivership. Receivership (Bankruptcy) gives a tenant the right to continue paying rent (not rent in arrears) and stay in the property or just walk away from the lease.

Lease terms are as critical as the tenant’s credit. A big company can go dark and continue paying the rent. They may or may not continue maintaining the building and the parking lot and landscaping. Often the tenant chooses the new tenant on a sub-lease and may put someone in the property that does not complement the current tenant-mix. The loss of a really good anchor can affect the income of all of the other tenants. In free standing build to suit facilities, always use “market rent” to determine the value rather than contract rent. Most of these leases contain “weasel clauses”, that allow the tenant to move out with no repercussion. If the contract rent is higher than market rent, the landlord can be upside down.

David Segrest is a REALTOR® in Charlotte NC. His website is http://www.segrestrealty.com His email is david@segrestrealty.com He is also a contributor on Argentina to: http://realestatebloginternational.com/