Due Diligence is the disciplined process you use to lower the risk of investing in Commercial Property. This risk typically comes in four “flavors” when you are investing in Commercial Real Estate.
- Market Risk: Will the fundamental conditions of this market allow me to meet my return on investment (ROI) goals?
- Financial/Performance Risk: Does the projected financial performance of this property meet my ROI goals
- Tenant Risk: Will these Tenants allow me to meet my ROI goals?
- Physical Risk: Will the physical structure of this property support my ROI goals?
The third area of risk… Tenant Risk… deserves special attention when you are buying Retail, Office and Industrial Properties. These property types carry an additional layer of risk you don’t see in Multifamily because your Tenants aren’t just living in your building… they are doing business within your Property.
Their ability to pay your rent is predicated upon the health of their business and not just on their ability to draw a paycheck.
In order to lower your Tenant Risk you must understand the nature and strength of the businesses of each of your Tenants. Where in Multifamily you might stop at reviewing the Tenant’s background check and payment history… in Retail, Office and Industrial you have to go further and really research the viability of each Tenant’s business. This has never been more important than in today’s economy.
No matter what your Lease says, if your Tenant goes out of business, you will have a vacancy to deal with.
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Researching your Tenant’s Business has several steps…
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Now a Rubber Chicken is pretty useless … except as a practical Joke. Let’s take a look at the most useless number in Commercial Real Estate. 