How to Analyse a Tenant and Lease Before Buying a Commercial Property

So, you’ve found a commercial property that looks like a great investment. The numbers seem solid, the location is promising, and you’re ready to move forward. But before you commit, there’s one critical step you can’t afford to overlook—analysing the tenant and lease.

A strong lease with a reliable tenant can mean steady income and long-term security. On the other hand, a weak tenant or poorly structured lease could turn your investment into a financial headache. Here’s how to properly evaluate both before making your purchase.

1. Understanding the Tenant’s Financial Strength

A commercial property’s value is closely tied to the strength of its tenant. If the tenant is unreliable, your rental income—and ultimately your loan approval—could be at risk. Here’s what to look for:

Tenant Type Matters

Not all tenants are created equal. Consider:

• National or multinational companies – Often the most secure, as they have strong financial backing.

• Established local businesses – A good option if they have a long history of profitability.

• Startups and small businesses – Higher risk unless they have solid financials or a personal guarantee from the owner.

Review Their Financials (If Available)

For larger tenants, ask for financial statements or credit reports. You want to see:

✅ Strong revenue and profitability

✅ Low levels of debt

✅ A history of stable operations

For smaller tenants, consider checking business credit ratings or requesting trade references from suppliers or previous landlords.

Look at the Industry Trends

Even if a tenant looks solid on paper, their industry might be struggling. For example:

🚚 Warehousing & logistics? Growing demand.

🏬 Traditional retail? More risk due to e-commerce trends.

🖥️ Tech startups? Can be volatile unless well-funded.

A tenant in a declining industry could struggle to meet their lease obligations in the long run.

2. Breaking Down the Lease Agreement

Once you're comfortable with the tenant, it’s time to dissect the lease agreement. Key areas to review include:

Lease Term & Stability

A longer lease provides stability and security. Most commercial leases run for 5-10 years, sometimes with options to renew.

✅ What’s ideal? A long-term lease with a stable tenant.

⚠️ Red flag: A short-term lease with no renewal options—this could mean vacancy risk.

Rent & Escalations

Make sure the rent is in line with market rates. Then, check how rent increases are structured:

• Fixed increases (e.g., 3% per year) – Provides predictable growth.

• CPI-linked increases – Moves with inflation.

• Market reviews – Rent is adjusted to market conditions (can be good or bad).

If the lease doesn’t include regular rent increases, you could lose out on future rental growth.

Who Pays for Outgoings?

In commercial real estate, tenants often cover outgoings (expenses like property taxes, insurance, and maintenance). There are two main types of leases:

• Net Lease – The tenant pays outgoings, which reduces your costs.

• Gross Lease – The landlord covers outgoings, so you need to factor this into your cash flow.

✅ What’s ideal? A net lease where the tenant covers most expenses.

⚠️ Red flag: A lease where the landlord pays major expenses without compensation in rent.

Security Deposits & Guarantees

What happens if the tenant stops paying rent? A good lease includes security measures, such as:

• A bank guarantee (often 3-6 months' rent)

• A personal guarantee from the business owner (useful for smaller businesses)

• A rental bond

✅ What’s ideal? A strong financial security that protects you from default.

⚠️ Red flag: No security deposit or guarantee—higher risk if the tenant defaults.

3. Vacancy & Re-leasing Risk

Even if the tenant looks great now, what happens if they leave at the end of the lease? Some key questions to ask:

• Is demand strong in the area? High demand means lower vacancy risk.

• How much competition is there? Too many similar properties could make it hard to re-lease.

• Is the property adaptable? A generic warehouse is easier to lease than a highly specialized facility.

✅ What’s ideal? A tenant with a long lease and renewal options, in a location with high demand.

⚠️ Red flag: A single-use property with a niche tenant—if they leave, re-leasing could be tough.

4. Commercial Property Leases & Loans

Acquiring a commercial property with an existing tenant on a long-term, robust lease can significantly enhance your ability to secure financing in Australia. Here's how such a scenario influences the loan approval process:

1. Assured Income Stream

Lenders prioritise properties that generate consistent rental income, as it ensures the borrower's capacity to meet loan repayments. A property with a stable tenant under a long-term lease provides this assurance, making the investment less risky for banks. This perception can lead to more favourable loan terms and interest rates, facilitating easier financing for investors.

2. Weighted Average Lease Expiry (WALE)

The WALE metric measures the average time until all leases within a property expire. A longer WALE indicates sustained rental income, which is attractive to lenders. Banks often assess the WALE to determine the security of their investment, with longer lease terms reflecting positively on the property's financial stability.

3. Tenant's Financial Strength

The financial health of the existing tenant is crucial. A tenant with a solid credit history and reliable payment record reduces the risk of missed rent payments, ensuring a stable income stream for loan repayment. Lenders view such scenarios favourably, potentially simplifying the approval process and leading to more favourable loan terms.

4. Simplified Loan Assessment

With a strong lease in place, lenders can focus on the property's income-generating potential rather than solely on the borrower's financial standing. This shift can streamline the loan approval process, making it more efficient and potentially quicker.

5. Enhanced Borrowing Capacity

Commercial properties with existing, reliable tenants can positively impact an investor's borrowing capacity. The stable income from such properties can improve serviceability assessments, enabling investors to access higher loan amounts or better terms.

Purchasing a commercial property with a strong, long-term lease not only provides immediate rental income but also positions you favourably in the eyes of lenders, facilitating a smoother and potentially more advantageous loan approval process.

Final Thoughts

A commercial property’s success isn’t just about the building—it’s about who is paying the rent and under what terms. Before you invest, make sure to:

✅ Assess the tenant’s financial strength and industry stability.

✅ Scrutinise lease terms like rent escalations, outgoings, and security deposits.

✅ Consider vacancy risk and how easy it would be to replace the tenant.

A well-structured lease with a reliable tenant can turn a good property into a great investment. But securing the right finance is just as important. Lenders favor properties with strong leases and stable tenants, which can improve your borrowing power and loan terms.

If you're looking to finance a commercial property purchase—or want expert insights on structuring a deal that maximises your returns—let’s connect. CapStack specialises in helping investors navigate the commercial lending landscape, ensuring you get the best terms possible.

📩 Send us a message or call today to discuss your investment plans.

A well-structured lease with a reliable tenant can turn a good property into a great investment. Need help navigating the finance side of things? Let’s talk about how to structure your loan for maximum returns.

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