Why Do Landlords Require a Business Plan From Potential Tenants?
Across the US, on a daily basis, owners of office complexes, strip malls and other commercial properties demand, time and again, that potential tenants supply them with a business plan before their application is considered for leasing.
Why do landlords ask perspective tenants to supply a business plan before their applications accepted? Further, can a landlord actually reject a business based on their business plan? There are sound business reasons for landlords to follow this process. And yes, landlords are well within their rights to reject a tenant based on a business plan, based on our opinions.
There are numerous reasons for landlords to require a business plan. A common reason for the need of the business plan is to ensure that the prospective tenant will diversify product offerings for the location.
Diversify their Tenant Portfolio
If you think about it, a strip mall often contains approximately 4 to 20 suites for leasing. If these suites are predominantly occupied by restaurants or similar retail offerings, such as furniture stores, then the strip mall lacks diversity. Lacking diversity for a strip mall means that future tenants may not want to be part of the particular niche “product offering” associated with the strip mall. In other words, if a strip mall has five restaurants, people are going to come to the strip mall for dinning. From this, specialty retailers, for example, may not perform well due to their disconnect with the dinning industry. As a result, the landlord is limiting their rental opportunities to complementary services related to dinning. Not a great business strategy.
Improve the Likelihood of the Tenant's Success
A second reason, and probably the most important reason, that a landlord will ask for a business plan is to ensure that the future tenant will be successful in their business endeavors. When the landlord allows a tenant to sign a lease, the landlord is now vested in the tenant’s success. Often times, landlords spend significant funds to assist in building out a facility to accommodate the new tenant. This money is spent upfront by the landlord in hopes of recuperating the costs over the next several years in the form of lease payments. If the business fails, not only is the landlord out of a tenant, and their lease payments, but they are also out of funds spent in the buildout process. Even worse, the time spent with this tenant is time taken away from other, better business opportunities.
From these reasons, landlords can most absolutely reject a potential tenant based solely on their business plan, in our opinion. However, there are actions that a potential tenant may take to ensure or at least increase the odds and likelihood of being accepted by a landlord.
Improve your Chances of Acceptance with a Feasibility Report
An important action for tenants may be to have a market research or feasibility report done. A feasibility report will thoroughly analyze the external environment of a company to determine the feasibility or likelihood that a company will be successful in a specific area. This report is significantly different than a business plan in several respects. However, the main difference is that a feasibility report thoroughly examines the external environment of a company. Whereas a business plan is a broad overview of both the internal and external environments.
Have Your Business Plan Professionally Written
A second step is to have a professionally written business plan done by a business plan professional. A professional business plan writer will thoroughly assess both the internal and external environments of the company. Through this detailed review, the writer should systematically analyze and discuss how the company will thrive in a specific location, based on important segments of a business’s operations.
When the potential tenant has both, the feasibility report and business plan, their likelihood of attaining acceptance from a landlord may significantly increase. Presenting both documents to a landlord shows that the tenant has thoroughly vetted the area, location and business concept. Further, the feasibility report and business plan often include different perspectives on a business. This further strengthens the perception that a business will be successful at a particular location.
In summary, there are sound business reasons why landlords require a business plan before they will accept a tenant. Fortunately, there are also significant benefits that may arise from this requirement for the potential tenant. With that said, before even speaking with a landlord, make sure to do your research and have your business plan and feasibility study ready for submission.
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Author: Paul Borosky, Doctoral Candidate, MBA.