Landlords often require one or more personal financial statements for a commercial lease to determine whether an applicant would make a good or bad tenant.
Personal financial statements are sometimes part of the commercial rental application process because they show whether or not an applicant with a new business has the ability and money to cover the lease.
A personal financial statement can shed light on how much of a risk a start-up company is for a landlord, which is essential for those considering applicants for a long-term lease.
As a commercial landlord, you should obtain personal financial statements from your applicants with new businesses or those with limited financial history. Requesting these documents helps you pick a tenant who is responsible and low-risk.
Read on to learn more about why you should ask certain commercial applicants for personal financial statements.
This article also explains which documents to request, to show applicants’ financial background aside from their business financial history or as their business banking history if they are sole proprietors.
Why Ask Tenants to Provide a Personal Financial Statement for a Commercial Lease?
Commercial landlords sometimes ask tenants to provide personal financial statements to show that they would make quality tenants — that is, they will pay rent on time and add value to the property.
Personal financial statements show the landlord:
- Whether certain applicants have money to cover the lease even if their business does not have a lengthy financial history
- The likelihood of an individual applicant making money in the future
Asking for a personal financial statement for a commercial lease is essential when you are unsure whether applicants will pay rent on time because they do not have a lengthy business financial history.
Additionally, many sole proprietors should provide personal financial information because they do not have a business bank account.
In summary, here are some scenarios where you may want to ask for detailed personal financial statements:
- If the tenant is a sole proprietor
- If the tenant is a new startup with little to no rental history
- If the tenant has not been in business for a long time
What Personal Financials to Request for Commercial Leases?
There are many types of personal financial statements and pieces of information you can ask for when screening prospective commercial tenants.
However, keep in mind that you need to obtain authorization from applicants before collecting this information.
What the Applicant Should Provide at a Minimum
Here are the financials you should always ask of potential business renters:
Personal Tax Returns
Request personal tax returns from the previous two years.
Personal tax returns help inform whether or not a certain commercial applicant is in good standing with the IRS and these documents reveal past income.
Profit and Loss (P&L) Statement
A P&L statement shows an applicant’s spending, budget, and plans to make enough money to cover the rent.
The ideal candidate for your rental should also have sufficient income for property maintenance, advertising, and payments to staff.
Balance Sheet
A balance sheet shows the applicant’s assets, liabilities, and equity.
Bank Statements
Many landlords require personal bank statements with a commercial rental application since these documents can show whether or not a potential tenant has enough assets, including cash, to cover monthly rent payments.
Your prospective tenant should also provide their bank account number for the rental application, so you can confirm they own the account.
Some commercial lease agreements have verbiage addressing what would happen if a tenant defaults beyond paying rent. These clauses often cover the total lease value, so rent due throughout the lease can be due immediately upon default.
If your commercial lease contract has this kind of language, you need to look at your applicant’s bank statement to see if they have the business or personal assets to pay off the total lease value.
Additional Documents You May Request From an Applicant
Here are other financials you can request from applicants if you want to know additional information about the state of their businesses:
Bank References
Many landlords request bank references from potential tenants.
A bank reference is a letter from the applicant’s bank manager. This type of financial document explains whether or not your prospective renter is in good standing with accounts and loans at the bank.
Current and Previous Landlord References
If applicable, commercial renters should provide current and previous landlord references just like residential tenants. These references show you whether or not a prospective tenant has a history of:
- Paying rent late
- Failing to maintain rental property
Copy of the Applicant’s Business Plan
If an applicant’s company is new or has recently come back into business, you should ask for a copy of the prospective renter’s business plan.
Look through this document to see if the business’ plans for making money hold water.
If you believe an applicant is unlikely to make enough money to pay rent, you should decline their commercial lease application.
Current Credit Reports and Scores
Always get current credit scores and reports from your prospective tenant.
A business credit score and an owner’s credit score reveal applicants’ credit history and their likelihood of maintaining these good financial habits.
Summary
You need to ask for a personal financial statement for a commercial lease in many instances because you want to get the best tenant for your commercial space.
To start creating the documents you need to request personal financial statements, use the commercial lease application builder at LegalTemplates.net.
Frequently Asked Questions (FAQs)
Bank references on a commercial rental application are letters from banks that document prospective tenants’ financial status and inform on the likelihood of them meeting their payment obligations under the tenancy.What are bank references on a rental application?
A business reference for a rental application is a letter from someone who is familiar with your prospective tenant in a professional capacity. This individual should know your prospective tenant well enough to speak about the individual’s character and business success.What is a business reference for a rental application?
Also known as a commercial tenant application form, a commercial tenant information sheet is a document landlords use to gather information from commercial tenants for tenant screening.What is a commercial tenant information sheet?
