As economies around the world continue to struggle, so landlords need to be increasingly vigilant about their tenants' ability to pay. Conducting a tenant appraisal can provide peace of mind about existing occupiers, as well as prospective ones.
When it comes to prospective tenants, assessing ability to meet annual rental obligations is essential. An independent assessment, performed by Moore Stephens experts, helps landlords manage the risk of a tenant becoming unable to pay its rent – thus providing assurance about future income streams. "This can be particularly important in an uncertain economic environment, where retailers and other occupiers may face poorer than expected trading conditions and suffer reduced cash flow," says Jeremy Willmont, partner in Moore Stephens' Corporate Advisory team in London.
Though a variety of methodologies can be used in a prospective tenant appraisal, a combination of financial and corporate advisory skills are generally applied to review the tenant's financial statements and its credit ratings. "A face to face interview with the tenant's finance director may also be involved to help put the figures in context," Jeremy says.
Conducting appraisals of existing tenants is also becoming increasingly important in the current economic environment. Even tenants who have been reliable in the past can struggle to meet future rental commitments during an economic downturn. "Operating results and cash flow can be affected rapidly, whether by reduced consumer or business spending," Jeremy warns "Essential advice for any landlord is to 'know your tenant'."
Vigilant landlords, building managers and managing agents should be on the look out for warning signs that a tenant may be facing financial difficulty. For a tenant occupying premises in a shopping centre, such signs could include reduced customer footfall, fewer staff in the store or a change in stock levels. "A reduction of stock could suggest insufficient cash to buy in goods, while excessive, slow moving stock could indicate low sales and poor controls," Jeremy says. "For all tenants, any delay in payment of service charges should also sound the alarm."
Apart from conducting appraisals of prospective and current tenants, Moore Stephens can also work with tenants that are experiencing difficulties to improve their operating performance. In this way, the risk of a tenant defaulting on rental payments can be reduced even further.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
