In our current battle against COVID-19, uncertainty is heightened and market participants are scrambling to understand what might happen today, tomorrow, and further into the future. Uncertainty and its measure, risk, are paradoxically very easy to see yet challenging to quantify, especially in the high uncertainty period we find ourselves in today. Similarly, the value of tenant creditworthiness to a landlord is apparent and yet difficult to assess, particularly right now.
Therefore, it seems like the perfect time and the worst time to discuss how we can evaluate the value of tenant credit to a landlord. The essence of creditworthiness is establishing a level of trust in another based on past actions. When there is uncertainty in a market, credit would increase in importance. However, when there is too much negative noise in the economy, the value of credit can be significantly diminished by current events because it becomes nearly impossible to quantify. Consider that Bear Sterns posted record earnings in 2006.
Evaluating the value of tenant credit to a landlord is always a relative equation involving many different variables. In other words, “it depends”. In the next few weeks I will provide a framework for thinking about how to evaluate the value of tenant credit from a landlord’s perspective. This framework is invaluable to tenants wishing to negotiate terms effectively with a landlord. By projecting the value a landlord places on credit, tenants can translate that value into leverage for better lease terms and competitive advantage over other prospective tenants.