| name | tenant-credit-analyst |
| description | Use when assessing a prospective tenant's creditworthiness from financial statements, computing DSCR/current ratio/debt-to-equity, estimating default probability, recommending security structures (deposit, LC, personal guarantee), or sizing financial covenants for a lease. |
Tenant Credit Analyst
Overview
Tenant credit analysis determines:
- Default probability: Likelihood tenant cannot pay rent
- Credit quality: Strength of tenant's financial position
- Security requirements: Deposits, guarantees, financial covenants needed
- Lease structuring: Appropriate rent escalations, term, and protections
Critical Insight: Rent is worthless if tenant defaults. Credit analysis is the first step in lease negotiation.
Core Concepts
Debt Service Coverage Ratio (DSCR)
Definition: Ability to cover rent from operating cash flow.
Formula:
DSCR = Net Operating Income (NOI) ÷ Annual Rent
Where:
NOI = EBITDA or Operating Cash Flow
Annual Rent = Base Rent + Estimated Operating Costs
Interpretation:
- DSCR > 2.0: Strong (2x coverage)
- DSCR 1.5-2.0: Acceptable (modest cushion)
- DSCR 1.2-1.5: Marginal (thin cushion, require security)
- DSCR < 1.2: High risk (insufficient cash flow, reject or require guarantees)
Minimum Standard: 1.25-1.50 for most industrial/office leases
Current Ratio
Definition: Ability to pay short-term obligations (including rent).
Formula:
Current Ratio = Current Assets ÷ Current Liabilities
Interpretation:
- >2.0: Strong liquidity
- 1.5-2.0: Adequate liquidity
- 1.0-1.5: Tight liquidity (monitor)
- <1.0: Liquidity crisis (reject)
Minimum Standard: 1.5 for most commercial tenants
Debt-to-Equity Ratio
Definition: Financial leverage and solvency.
Formula:
Debt-to-Equity = Total Liabilities ÷ Shareholders' Equity
Interpretation:
- <1.0: Conservative (low leverage)
- 1.0-2.0: Moderate (acceptable)
- 2.0-4.0: Aggressive (require guarantees)
- >4.0: Over-leveraged (high risk)
Context: Varies by industry (capital-intensive businesses have higher D/E)
Working Capital
Definition: Liquidity cushion to absorb short-term fluctuations.
Formula:
Working Capital = Current Assets - Current Liabilities
Interpretation:
- Positive and growing: Healthy
- Positive but declining: Warning sign
- Negative: Cash flow stress (reject unless guaranteed)
Rule of Thumb: Working capital should exceed 6-12 months of rent
Methodology
Step 1: Obtain Financial Statements
Required documents:
- Balance Sheet: Assets, liabilities, equity
- Income Statement (P&L): Revenue, expenses, net income
- Cash Flow Statement: Operating, investing, financing cash flows
- Notes to Financial Statements: Accounting policies, contingencies
Preferred: Audited or review engagement (CPA prepared)
Acceptable: Notice to Reader (compilation)
Red Flag: Internally prepared (no CPA oversight)
Time Period: Most recent 2-3 years
Step 2: Calculate Key Ratios
Liquidity Ratios:
- Current Ratio
- Quick Ratio (excluding inventory)
- Working Capital
Leverage Ratios:
- Debt-to-Equity
- Total Liabilities ÷ Total Assets
- Interest Coverage Ratio
Profitability Ratios:
- Gross Margin
- Operating Margin
- Net Margin
- Return on Assets (ROA)
- Return on Equity (ROE)
Cash Flow Ratios:
- Operating Cash Flow ÷ Current Liabilities
- Free Cash Flow (after capex)
- DSCR (operating cash flow ÷ rent)
Step 3: Trend Analysis
Compare current year vs. prior years:
- Improving trends: Revenue growth, margin expansion, debt reduction
- Deteriorating trends: Revenue decline, margin compression, increasing leverage
- Red flags: Sudden changes, inconsistent performance
Step 4: Industry Benchmarking
Compare tenant's ratios to industry norms:
- Use industry reports (RMA, Statistics Canada, Dun & Bradstreet)
- Identify outliers (above/below industry standards)
- Adjust expectations for industry (e.g., grocery stores have low margins but high turnover)
Step 5: Qualitative Assessment
Beyond numbers:
- Management quality: Experience, track record
- Business model: Recurring revenue, customer concentration
- Industry dynamics: Growth vs. declining industry
- Competitive position: Market share, differentiation
- Litigation/contingencies: Lawsuits, regulatory issues
Step 6: Credit Scoring
Assign credit grade:
A+ / A / A-: Excellent credit (Fortune 500, strong financials)
B+ / B / B-: Good credit (solid financials, some leverage acceptable)
C+ / C / C-: Acceptable credit (requires standard security: deposit)
D+ / D / D-: Marginal credit (requires enhanced security: deposit + guarantee)
E: Poor credit (reject or require full guarantee + large deposit)
Step 7: Security Recommendations
Based on credit grade:
Grade A: Minimal security (1-2 months deposit or waive)
Grade B: Standard security (3 months deposit)
Grade C: Enhanced security (6 months deposit or partial guarantee)
Grade D: Strong security (12 months deposit + personal guarantee)
Grade E: Maximum security (full personal guarantee + 12 months deposit) or reject
Key Metrics
Debt Service Coverage Ratio (DSCR)
- Formula: NOI ÷ Annual Rent
- Minimum: 1.25-1.50
- Target: 2.0+
Current Ratio
- Formula: Current Assets ÷ Current Liabilities
- Minimum: 1.5
- Target: 2.0+
Debt-to-Equity
- Formula: Total Liabilities ÷ Equity
- Maximum: 2.0-3.0 (industry dependent)
- Target: <1.5
Revenue Growth
- Formula: (Current Year Revenue - Prior Year Revenue) ÷ Prior Year Revenue
- Red Flag: Negative growth for 2+ consecutive years
- Target: Positive and consistent
Operating Margin
- Formula: Operating Income ÷ Revenue
- Industry Dependent: Compare to industry norms
- Red Flag: Declining margins
Red Flags
Financial Statement Red Flags
Qualified Audit Opinion:
- Auditor expresses concerns or limitations
- Action: Request explanation, consider rejection
Going Concern Warning:
- Auditor questions ability to continue operations
- Action: Reject or require immediate guarantee
Negative Equity:
- Liabilities exceed assets
- Action: Reject (insolvent)
Negative Working Capital:
- Current liabilities exceed current assets
- Action: Require guarantee or large deposit
Declining Revenue (2+ years):
- Business is shrinking
- Action: Require enhanced security, shorter term
Losses (Net Income < 0):
- Unprofitable operations
- Action: Assess sustainability, require guarantee if persistent losses
Cash Flow Red Flags
Negative Operating Cash Flow:
- Burning cash from operations
- Action: Reject unless startup with equity financing
High Capex Relative to Cash Flow:
- Capital spending exceeds operating cash flow
- Action: Monitor liquidity, may indicate growth or distress
High Debt Service:
- Interest + principal payments exceed operating cash flow
- Action: Refinancing risk, require guarantee
Qualitative Red Flags
Frequent Address Changes:
- Moved multiple times in recent years
- Action: Flight risk, require larger deposit
Litigation / Judgments:
- Outstanding lawsuits or judgments
- Action: Assess materiality, may require guarantee
Tax Liens / Garnishments:
- Government claims against tenant
- Action: High default risk, reject or guarantee
Multiple Related-Party Transactions:
- Payments to owners/family members
- Action: May be masking profitability or siphoning cash
Customer Concentration:
-
50% of revenue from 1-2 customers
- Action: Loss of key customer = default risk
Common Use Cases
Use Case 1: New Tenant Application
Situation: Manufacturing company applies for 10,000 sf industrial space at $8/sf/year = $80,000/year rent. Submits 3 years of financial statements.
Analysis:
- Calculate DSCR: NOI = $180,000, DSCR = $180,000 ÷ $80,000 = 2.25 (Strong)
- Current Ratio: $420,000 ÷ $280,000 = 1.5 (Acceptable)
- Debt-to-Equity: $500,000 ÷ $300,000 = 1.67 (Moderate)
- Revenue trend: Year 1: $2M, Year 2: $2.2M, Year 3: $2.5M (Growing)
- Profitability: Net margin = 9% (Healthy for manufacturing)
Output:
Credit Grade: B+
Security Recommendation: 3 months rent deposit ($20,000)
Lease Term: 5 years acceptable
Covenants: Annual financial statement requirement
Recommendation: APPROVE with standard security
Use Case 2: Startup Tenant
Situation: Technology startup (2 years old) applies for office space. Limited operating history, venture capital funded.
Analysis:
- DSCR: Negative NOI (losses), DSCR = N/A
- Current Ratio: $1.2M ÷ $300K = 4.0 (Strong liquidity from equity raise)
- Debt-to-Equity: $300K ÷ $900K = 0.33 (Low leverage)
- Cash burn: $50K/month, 24 months runway remaining
- Venture backing: $2M Series A raised 6 months ago
Output:
Credit Grade: C- (early stage, unprofitable)
Security Recommendation:
- 12 months rent deposit ($120K), OR
- Personal guarantee from founders + 6 months deposit
Lease Term: 3 years maximum (matches runway)
Covenants: Quarterly financial statements, maintain $500K minimum cash balance
Recommendation: CONDITIONAL APPROVAL (require enhanced security)
Use Case 3: Renewal - Credit Deterioration
Situation: Existing tenant (8 years in building) requests 5-year renewal. Recent financials show declining performance.
Analysis:
- DSCR: Was 2.5, now 1.3 (declining but still acceptable)
- Current Ratio: Was 2.0, now 1.4 (tight liquidity)
- Revenue: Declined 15% year-over-year
- Net Income: Positive but down 40%
- Management explanation: Lost major customer, rebuilding
Output:
Credit Grade: C+ (was B+, downgraded)
Security Recommendation:
- Increase deposit from 3 months to 6 months
- Add financial covenant: Maintain DSCR > 1.25
- Quarterly reporting requirement
Lease Term: 3 years (shorter than requested 5 years)
Rent: Below-market renewal to support recovery
Recommendation: APPROVE RENEWAL with enhanced security (better than vacancy)
Use Case 4: Corporate Guarantor Analysis
Situation: Tenant has weak credit (DSCR 1.1), but parent company offers corporate guarantee.
Analysis - Guarantor:
- Parent DSCR: 3.5 (strong)
- Parent Current Ratio: 2.2 (strong)
- Parent Debt-to-Equity: 0.8 (conservative)
- Parent Net Worth: $15M (> 10x annual rent)
- Guarantee structure: Absolute and unconditional
Output:
Tenant Credit Grade: D
Guarantor Credit Grade: A-
Security Recommendation:
- Absolute and unconditional corporate guarantee from parent
- 3 months deposit (standard)
Lease Term: 5 years acceptable (based on guarantor strength)
Recommendation: APPROVE (rely on parent guarantee, not tenant)
Integration with Slash Commands
This skill is automatically loaded when:
- User mentions: tenant credit, DSCR, financial analysis, credit risk, guarantee, security deposit
- Commands invoked:
/tenant-credit, /default-analysis
- Reading files:
*financial*statement*, *balance*sheet*, *income*statement*
Related Commands:
/tenant-credit <financial-statements-path> - Full credit analysis with scoring and security recommendations/default-analysis <lease-path> <default-description> - Assess default scenarios and landlord remedies
Examples
Example 1: Comprehensive Credit Analysis
Tenant: Acme Distribution Inc.
Space: 20,000 sf industrial warehouse
Proposed Rent: $10/sf/year = $200,000/year
Financial Data (Most Recent Year):
- Revenue: $5,000,000
- Gross Profit: $1,250,000 (25% margin)
- Operating Expenses: $900,000
- EBITDA: $350,000
- Net Income: $200,000
- Current Assets: $1,200,000
- Current Liabilities: $600,000
- Total Assets: $2,500,000
- Total Liabilities: $1,400,000
- Shareholders' Equity: $1,100,000
Ratio Analysis:
DSCR = $350,000 ÷ $200,000 = 1.75 ✓ (Acceptable, above 1.50 minimum)
Current Ratio = $1,200,000 ÷ $600,000 = 2.0 ✓ (Strong liquidity)
Debt-to-Equity = $1,400,000 ÷ $1,100,000 = 1.27 ✓ (Moderate leverage)
Working Capital = $1,200,000 - $600,000 = $600,000 ✓ (3x annual rent)
Operating Margin = $350,000 ÷ $5,000,000 = 7% (Typical for distribution)
ROE = $200,000 ÷ $1,100,000 = 18% ✓ (Strong return)
Trend Analysis (3 years):
- Revenue: $4.2M → $4.7M → $5.0M (Growing 6-8%/year)
- EBITDA Margin: 6.5% → 7.2% → 7.0% (Stable)
- Debt-to-Equity: 1.45 → 1.35 → 1.27 (Deleveraging)
Credit Decision:
Credit Grade: B+
Strengths:
- Strong DSCR (1.75x)
- Excellent liquidity (2.0 current ratio)
- Consistent revenue growth
- Deleveraging trend
Weaknesses:
- Moderate leverage (D/E 1.27)
- Industry-typical low margins
Security Recommendation: 3 months rent deposit ($50,000)
Lease Term: 5 years
Covenants: Annual financial statements, maintain DSCR > 1.25
Personal Guarantee: Not required
RECOMMENDATION: APPROVE
Example 2: Red Flag Analysis
Tenant: Struggling Retail Corp.
Financial Data:
- Revenue: Year 1: $2.5M, Year 2: $2.2M, Year 3: $1.8M (declining 15-20%/year)
- Net Income: Year 3: -$150,000 (loss)
- Current Ratio: 0.9 (current liabilities exceed current assets)
- Debt-to-Equity: 4.5 (highly leveraged)
- DSCR: N/A (negative EBITDA)
- Audit Opinion: Going Concern warning
Red Flags Identified:
- Declining revenue (3 consecutive years)
- Unprofitable (net loss)
- Negative working capital (current ratio < 1.0)
- Over-leveraged (D/E 4.5)
- Going Concern warning (auditor doubts ability to continue)
Credit Decision:
Credit Grade: E (High Risk)
RECOMMENDATION: REJECT
Rationale:
- Insufficient cash flow to cover rent
- Insolvency risk (negative working capital)
- Auditor going concern warning
- Declining business trend
Alternative: Only consider if:
- Personal guarantee from solvent guarantor (net worth > $1M)
- 12 months rent deposit ($240K)
- Short-term lease (1 year)
- Above-market rent to compensate for risk
Skill Version: 1.0
Last Updated: November 13, 2025
Related Skills: commercial-lease-expert, indemnity-expert, default-and-remedies-advisor, effective-rent-analyzer
Related Commands: /tenant-credit, /default-analysis (VTS approval memos are now generated via the commercial-lease-expert skill, which auto-loads on relevant questions)
