Know Tenant Before Leasing

Landlords should thoroughly research tenants before signing a lease, warns Ed Kearney of the Florida commercial real estate brokerage firm Kearney Commercial Realty/Sperry Van Ness. The due diligence could save money and avoid potential legal and financial problems.

“I am sounding a loud note of warning because I represented landlords that could have suffered severe financial damage,” says Kearney. “My investigation of one potential tenant uncovered problems that wisely led us to walk away from what turned out to be a bad deal.”

Recently, a recycling firm approached Kearney, saying it wanted to lease 50,000 square feet of industrial space in the West Palm Beach area. The company said it had contracts with Fortune 500 retailers to recycle their cardboard and paper. To handle that waste, the company had to install special equipment and brought in engineers to design the space. To anchor recycling-related equipment, the prospective tenant asked the landlord to cut holes in the new concrete deck the property owner had recently spent $400,000 to install. The nature of that request for improvements and other interactions sent up a warning signal. For example, when the two sides executed a letter of intent, the prospective tenant could not produce enough money to pay the security deposit, plus first and last month’s rent. Kearney repeatedly asked the prospect for financial statements, references, and bank documents. He found what he received lacking and pressed for explanations of inconsistencies and missing information. Dissatisfied with the responses, Kearney investigated the company and found that its principal had about a dozen court judgments, some of them large, against him.

The evidence that Kearney uncovered led him to advise his commercial real estate client not to sign the lease. After some discussion, the landlord agreed and the tenant went elsewhere. Within a year, that company disappeared without paying rent, inflicted more than $100,000 in property damage to a space it had been leasing, and caused so many other problems that the landlord’s broker had to give back his commission to the landlord.