Landlords use commercial tenant screening to choose the right renters for their commercial properties. They ensure they select applicants who can pay rent on time, treat the property with care, and have no adverse actions in their history that pose a risk.
This process involves reviewing an applicant’s business income and liabilities, crucial for protecting the landlord and the property. It also helps develop a strong relationship with tenants, fostering mutual trust and respect. If not conducted, landlords may risk renting to companies that fail to pay on time or maintain the rental property.
How to Conduct Commercial Tenant Screening
Here are the steps you should follow when screening your commercial applicants:
1. Review Your Potential Tenant’s Lease Application
Send your applicants a blank commercial lease application form and ask them to fill it out. After you receive the completed forms from them, review the information on the application and see if their business is worthy of your space.
If you think they would make a good tenant, move on to the next step. If not, tell the applicants that you will not continue with their application.
2. Verify the Company with the State
Every state has a Secretary of State’s office or a similar department that checks an entity’s status and ensures it is currently in good standing.
If applicants’ companies are not in good standing, they may not be able to pay rent on time.
Accordingly, you should decline applications from entities that are not in good standing with their state.
3. Get the Company’s Business Credit Score
The next step is to conduct a credit check through a business credit bureau such as Dun & Bradstreet or Experian.
Dun & Bradstreet is well-known in the industry. It assigns companies a business credit score called a PAYDEX score.
When you run a credit check with Dun & Bradstreet, you will receive a PAYDEX score from 1 to 100 based on your tenant’s creditworthiness and past payment performance.
4. Check the Company Owner’s Credit Score
After receiving the applicant’s business credit score, you should check the company owners’ credit score.
Unlike company credit scores, personal credit scores fall between 300 to 850, with 850 being the best score.
Your applicants should have scores of at least 700 for consideration of your rental. Ratings below 700 suggest that the prospective tenant may not be able to deal with the financial and legal liability of renting a commercial property.
5. Perform Background Checks on the Company Owners
Ensure your applicants are who they say they are by running a background check on them. Landlords can conduct background checks through various websites.
IMPORTANT
While there are many background check websites to choose from, not all are equal.
Be sure to find a background check provider that is Fair Credit Reporting Act (FCRA) compliant. If the vendor is not FCRA-compliant, you cannot use the check for screening purposes, and you might find yourself in trouble with the law.
6. Contact the Tenant’s References
Call your applicant’s references to verify:
- Credit history
- Rental history
- Bank account balances
Have your applicant’s filled-in commercial rental application form with you as you make the calls.
The applicant’s bank may want to see the signature and consent on the commercial lease application before revealing any information to you.
7. Get a Personal Guarantee from the Applicant
If you are still debating whether or not to accept the applicant, consider getting a personal guarantee from them.
This guarantee requires the individual business owners to personally continue rent payments until the lease expires — even if their business fails and cannot pay.
8. Make Your Decision
After accepting an applicant, send the business owner or principal a commercial lease agreement to sign.
TIP
If you decide to reject an applicant, mail a tenant rejection letter and explain why you denied the application.
Sending a tenant declination letter helps protect you in a case where the applicant claims rejection based on discrimination. It is also a courteous business practice.
Legal Aspects of Tenant Screening
When conducting commercial tenant screening, it’s crucial to navigate the legal landscape carefully. Missteps in this area can lead to serious legal consequences, including discrimination claims or violations of privacy laws. Here are the key legal aspects to consider:
Fair Housing and Anti-Discrimination Laws
Although the Fair Housing Act primarily applies to residential properties, its principles of non-discrimination can also influence commercial transactions. The Civil Rights Act of 1964, for instance, prohibits discrimination in all types of property transactions, including commercial leasing, based on race, color, religion, or national origin [1] . Some states and local jurisdictions extend protections to additional categories like sexual orientation, gender identity, and marital status.
To comply with these laws, ensure that your tenant screening process is impartial and based solely on objective, business-related criteria such as financial stability and the suitability of the tenant’s business for your property. Avoid any practices that could be perceived as discriminatory, even unintentionally.
Privacy Laws
Privacy laws regulate the collection, use, storage, and disposal of personal information obtained during the tenant screening process. The Fair Credit Reporting Act (FCRA) governs how consumer credit information is handled, which is particularly relevant when evaluating the personal credit of business owners [2] . You must obtain written consent from applicants before accessing their credit reports.
State laws may impose additional privacy requirements. For example, the California Consumer Privacy Act (CCPA) grants individuals the right to know what personal information is collected about them and how it is used and shared. Regardless of the specific laws in your jurisdiction, it’s essential to securely store and responsibly dispose of any personal information collected during the screening process.
Best Practices for Legal Compliance
To protect yourself from potential legal issues:
- Treat all applicants equally: Ensure that all applicants are subject to the same screening criteria and procedures.
- Obtain proper consent: Always get written permission before accessing personal or credit information.
- Secure personal data: Safeguard any personal information collected during the screening process and dispose of it appropriately once it is no longer needed.
- Consult with legal experts: Given the complexity of compliance, consider consulting with legal professionals to ensure your screening process adheres to all relevant laws and regulations.
Why Landlords Request Personal Financials for a Commercial Lease
Landlords often require personal financials to assess a tenant’s ability to meet lease obligations, especially for new or smaller businesses. Commercial leases are long-term commitments, so financial transparency helps landlords reduce risk and ensure stability.
Key Reasons Landlords Request Personal Financials
Understanding why landlords ask for personal financials can help tenants prepare and strengthen their lease applications.
- Assessing financial stability: Ensures the tenant can consistently pay rent and meet obligations
- Risk mitigation: Reduces the risk of leasing to businesses with limited financial history
- Personal guarantees: Some landlords require owners to personally guarantee rent payments
- New or smaller businesses: Startups and sole proprietors often lack an established credit history
- Leasehold improvements: Large investments in property upgrades may require stronger financial backing
- Negotiating leverage: Strong financials can help tenants secure better lease terms
By reviewing personal financials, landlords protect their investment and select reliable tenants, reducing the risk of defaults.
Best Commercial Tenant Screening Resources
Here are some of the best commercial tenant screening resources:
For business credit or PAYDEX scores:
- Dun & Bradstreet
- Experian
- Nav.com
For personal credit scores and background checks:
Laws about credit reports and applications
Examples
Example 1: A Well-Matched Tenant
- Success Story: A landlord in downtown Chicago sought a tenant for a premium office space. By conducting a thorough screening process, including a detailed review of the business’s credit score, background checks on the owners, and verifying references, the landlord secured a tenant with a strong financial background and a history of responsible property management. The tenant, a growing tech company, not only paid rent on time but also made improvements to the property, increasing its overall value.
- Lesson Learned: A meticulous screening process can result in finding a tenant who not only meets financial expectations but also enhances the value of the property.
Example 2: The Importance of Background Checks
- Problematic Screening: In another case, a landlord rented out a commercial space to a small retail business without conducting a full background check on the owners. Within a few months, the tenant started missing rent payments, and it was later discovered that the business owner had a history of financial troubles, including a bankruptcy filing that the landlord had missed during the initial screening.
- Lesson Learned: This situation underscores the importance of comprehensive background checks. Skipping steps can lead to significant financial losses and legal challenges.
Example 3: Screening for Long-Term Stability
- Success Story: A landlord in New York City’s bustling retail district used a detailed screening process to choose between multiple applicants. By focusing on the applicant’s business history, financial stability, and industry trends, the landlord selected a tenant with a strong track record and a solid business model. This tenant has now been in the space for over a decade, providing consistent income and minimal management issues.
Simplify Tenant Screening with Legal Templates
Finding the right commercial tenant can be complex, but Legal Templates makes it easier. Our customizable lease applications help you evaluate potential tenants efficiently, ensuring you select a financially stable and reliable business.
Frequently Asked Questions
Does commercial tenant screening include a background check?
Commercial tenant screening typically includes a background check. We recommend you get background checks on all company owners to verify their identities.
What is a good business credit score for a commercial lease?
Business credit scores for commercial leases, known as a PAYDEX score by Dun & Bradstreet, range from 0 to 100, with 100 being the best score.
Here is a breakdown of the score ranges:
- 0-49. High risk of late payment (average of 30 to 120 days beyond terms)
- 50-79. Medium risk of late payment (average of 30 or fewer days beyond terms)
- 80-100. Low risk of late payment (average of prompt to 30 days within terms)
Is a commercial rental application legally binding?
A commercial rental application is not a legally binding document to rent real estate, nor is it a contract.
Commercial lease applications are investigative tools landlords use to gather relevant information about prospective tenants.
How long does the screening process take?
The commercial tenant screening process typically takes 1 to 2 weeks. This timeline includes collecting and verifying documents, conducting credit and background checks, and contacting references. Delays may occur if there are issues with obtaining necessary information or if multiple applicants are being reviewed.
What are the most common reasons for application rejection?
Applications are often rejected due to poor business credit scores, insufficient financial stability, or negative background checks. Other common reasons include incomplete applications, businesses not in good standing with state authorities, or a mismatch between the tenant’s business needs and the property.
