MAKE SURE THAT YOUR LEASES ARE BACKED WITH ADEQUATE CREDIT!!!

I have frequently represented both landlords and tenants. So, occasionally one of my posts may seem to benefit either one side of the table or the other. This is a post for primarily for landlords.

Quite often, a tenant will come to the table seeking to have a corporate entity, LLC, or other limited liability entity as the tenant. Many times these entities are brand new, and/or they have no meaningful assets, no net worth, and no credit. It shocks me how often landlords, even on the institutional side of the coin, allow that to happen.

Sometimes, the landlords even put a fair amount of money out for tenant specific improvements, whether in the form of a tenant improvement allowance or by directly purchasing and installing items to benefit the tenant. Then, when the tenant runs into hard times and stops paying rent, those landlords have nothing to go after. It doesn't matter if the principals are worth a billion dollars. If you don't have them on the hook, you can't go after them. If the entity that signed your lease has nothing, then you have nothing.

During the dot.com heyday, landlords lost a fortune signing leases with new tech companies that had no financial wherewithal. They often spent well into the six figures providing tenant improvements and giving out tenant improvement allowances to those tenants. Then, when those companies went belly up, they brought their leases to their attorneys telling them to go make those rotten tenants pay. All they heard from their lawyers was "sorry...I can't help you".

If a tenant comes to you with a corporate entity, get financial statements and make sure that the exact entity that you have on the hook has sufficient income and net worth to pay your rent and other charges. If they don't, require a personal guarantee, have them post a letter of credit, require an additional security deposit, or take some other steps to make sure that you have viable credit on the lease.

If you install tenant improvements for the tenant, or give them a tenant improvement allowance, you are basically lending the tenant money. Instead of a note promising to pay that loan, you have a lease requiring rent payments. Theoretically, you've got the repayment amortized in your rent schedule. If the tenant defaults on the lease, you have no repayment of your "loan". No reputable lending institution would lend money without seeing financial statements and making sure that the borrower had the ability to repay. Landlords should think long and hard about doing so as well.