What financials do I need to obtain a commercial lease?
So your business has outgrown the garage and you’re ready to move into a newer, larger, more formal space. Congratulations, you’ve accomplished what most small businesses only dream of doing. The hardest work has been done, but you still have to find a building or office to lease, and, undoubtedly, you have questions. Do I need to submit financials in order to apply? What is the landlord looking for? What additional documentation should I have ready to present?
As commercial real estate experts, the PM Company has helped numerous small businesses navigate this next step. Whether you’re applying for a lease in the Mid-Ohio Valley or somewhere else around the country, follow these guidelines to improve your chances of leasing the building you want.
What is requested in a conventional lease application?
Before leasing a space, you may be asked a series of questions that demonstrate your reliability in paying the lease rate. You may be asked to provide information about the following aspects of your business:
- your business history
- a description of the services and/or products you provide
- references that signify your financial stability
- past/current/anticipated revenues
- assets that could be used as collateral
- liabilities the company may have, and references from a financial institution
What financial statements should you prepare?
Much in the same way you would approach a bank for a business loan, you will likely be asked to provide the landlord with some sort of financial documentation for your business. That documentation may include:
- prior tax returns for past 2-3 years
- personal or business financial reports (this depends on how you are securing the financial obligation to pay the lease rate)
- business balance sheet
- profit and loss statements
- bank statements for the past 2-3 months
In some instances, you may be asked to provide a copy of your business filing with the state (includes business use type) and your articles of incorporation.
Why are financials so important?
Your finances demonstrate your business’s ability to make regular lease payments. The equity required for construction and maintenance on a commercial property is typically much more financially intensive than a residential property, and, as a result, can greatly affect a business’s cash flow and financial stability. Landlords like to see a comprehensive picture of your ability to meet the terms of the lease.
In reviewing your application for a lease, landlords may consider:
- The type of business you run
- The potential effects competing businesses may have on your revenues
- The past and current size of your business
- The business’s growth trajectory, its profitability, and any other factors that could pose risks to the landlord.
What if the landlord is asking for additional documentation?
Lease application requirements may vary by landlord. In cases where there are multiple businesses in a shared facility with high-value clientele, the due diligence requests may become more extensive. Business bank statements, personal financial statements, copies of your business plan, and even a certificate of good standing from a lending agency could be necessary to gain entry. This shouldn’t give you alarm, however. Securing a spot in a prime location may pay dividends down the road. You can enjoy greater confidence as a lessee because your neighbors and fellow tenants care as much about their location and reputation as you do.
Why do the requirements vary so much?
Based on your location, the business community makeup, and local commercial vacancy rates, additional requirements can differ greatly. In regions where vacancy rates are high and tenants are harder to find, the application requirements could be as simple as providing the aforementioned financials and verification of income. Following a simple credit or background check, your lease could be approved rather quickly.
Should you find yourself in a market where vacancy rates are low and landlords have more discretion on who they admit, you may be asked to provide more documentation. In these cases, you should be prepared to provide additional financial documentation that exceeds the last 2 to 3 years of financial documents for your business. Be prepared to disclose any shared partner equity, other grantors you have worked with, business or financial institution references, or even personal credit scores.
While the prospect of obtaining in a commercial lease may sound daunting, you’ve likely already done everything necessary to set your business up in a phenomenal space. The hard work of building a business and achieving a level of scalability that demands a move likely ensures you have what it takes to lease your dream space so your business can be all that you want it to be.
If you are looking for a commercial space where your business can grow, the trusted professionals at the PM Company (PMC) are here to assist. PMC has been serving the Mid-Ohio Valley, specializing in commercial real estate and property management, for over 35 years. For more information visit call us at 304.485.8000.