When a landlord is negotiating with a tenant, understanding their balance sheet, cash position, debt burden and maturity schedule are key to a successful outcome.
"If they have debts, the tenant has held discussions with the lenders about a possible extension of the time they need to service them or add interest payments back to the calendar," said Brad Tisdahl, Principal and CEO of Tenant Risk Assessment.
Getting answers to these questions can help a landlord understand the tenant's balance sheet flexibility.
"We want to understand how flexible a company's balance sheet is in order to overcome the pandemic and the uncertainty associated with it," says Tisdahl. "When we think about it, we are trying to assess whether we are bringing relief to a tenant who may not survive the pandemic."
The lender's relationship with the tenant is critical.
"We're trying to understand whether a lender is going to be inflexible or if a company doesn't have enough cash to run for more than a few months," says Tishdahl. "This will be a big problem if the revenue doesn't come back." This is a critical step in the process and a real focus. "
However, these are not the only things landlords should look for when assessing a tenant's stamina. The landlord must identify the key business, industry, reputational, legal, regulatory and macro risks associated with the business.
"When looking for distressed tenants who ask for relief, landlords need to focus on evaluating a company and the industry," says Tisdahl. "Does the company have any reputational issues or are there any legal or regulatory issues hanging over them?"
Prior to the pandemic, Tisdahl said industry and tenant reputations are among the top issues assessing tenant risk for landlords. But other problems have emerged with COVID.
"It is not to say that it is less important now during the pandemic, but some of these factors are less important to the overall sustainability of the company," says Tisdahl. "You still want to know if a company has any lawsuits pending that could result in spending a lot of money on legal fees or settlements."
Understanding regulatory concerns is also a critical part of this analysis. "Landlords need to know if there are any regulatory problems that could make it either more expensive or cheaper for this company to conduct themselves," says Tisdahl. "For the most part, we've found that a company's legal and regulatory requirements are less of a priority for landlords right now [during COVID]."
