This text comes from the “Tenant Profiling” section in the new book, “The Little Book of Triple Net Lease Investing”.
This is an extremely important task for the simple reason that there must be a good fit between the tenant and the building. For example, putting a pharmacy in a building originally built for, say, an industrial purpose and located away from the general public, would be a fatal mistake. That’s because pharmacies are all about health and cleanliness and easy access. Industrial sites, on the other hand, represent the exact opposite of that. Such a mismatch of tenant and property is tantamount to business suicide, both for you and the tenant.
The investment team must profile prospective tenants in depth to ensure that the final selection involves a tenant who’s likely to reach maximum potential within the building. It must obey one of the ironclad “laws” of commercial real estate: the market value of a property is measured solely by its worth to the tenant it services.
The range of tenant options spans the local tenant providing a local service and operated by a local one-unit vendor, to a national brand tenant that’s a public company and listed on a stock exchange and which has billions of dollars in revenues, and everything in between.
Most national brand tenants can easily be profiled because so much public information is available on them, plus they’re rated by respected national agencies such as Moody’s, Fitch, and Standard and Poor’s. A local tenant can be just as good an investment as a national one; however, you need to evaluate this tenant in a different way since information isn’t as readily available. Here’s what you (or your investment team) would look for:
For more, read the full text of “The Little Book of Triple Net Lease Investing”.