Six Critical Steps to Navigating Tenant Credit and Leases Structures in a Covid-19 Environment

As the commercial real estate industry navigates the greatest tectonic shift in U.S. history regarding tenant credit, TRA strongly recommends that owners and institutional investors adhere to a six-step due diligence process with their tenants to minimize risk and protect their investments, while acting as a good fiduciary.

We are often asked how to secure a new lease or ensure a tenant will remain viable when extending rent relief during the era of Covid-19. We recommend that landlords require greater transparency from their tenants in these stressful and uncertain times. Informed credit analysis is the best way to prevent surprises and mitigate against risky tenants through robust analysis.

After the pandemic-imposed lockdowns took hold across the U.S., many commercial real estate owners and landlords were flooded with a wave a rent relief requests from distressed tenants.

We want to see every viable business succeed and hope that tenants in every industry can find ways to remain solvent. Unfortunately, the economic realities of the current climate are that some businesses are being stressed more than others, which not only puts them at financial risk, but puts their landlords at risk as well.

To assist with a problem that will likely last into the near future, TRA created the following six-step process for reviewing distressed tenants in addition to new leases:

1. Understand structure of the business and the nature of its revenue streams
2. Evaluate financial performance on the tenant or guarantor entity before and during the pandemic
3. Review sources of liquidity and evaluate overall balance sheet flexibility
4. Identify key business, industry, reputational, legal, regulatory, and macro risks associated with the business
5. Prepare a credit report on the tenant or guarantor entity and evaluate credit risk based on the proposed rent relief or new lease terms
6. Structure lease security or rent relief requests contingent on the credit profile and overall sustainability of the business

These six steps give landlords and real estate owners the necessary information and guidance to go into leases better informed and with open eyes. Our goal is help prepare all parties to understand and navigate the lease structure in a way and to a depth they may have not considered before. Connect with us to learn more about our process or to see how we can help you.