# Tenant Credit Analyst

> 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.

- Skill: `reggiechan74/tenant-credit-analyst` (Agent Skill, multi-file: 20 files)
- Install (CLI): `npx skillmds@latest add reggiechan74/tenant-credit-analyst`
- Raw SKILL.md: https://api.skillmd.com/api/skills/reggiechan74/tenant-credit-analyst/raw
- Safety review: pending
- Works with: Claude Code, Claude.ai, OpenAI Codex
- Category: Security
- Author: reggiechan74 (https://skillmd.com/u/reggiechan74)
- Updated: 2026-09-17
- Page: https://skillmd.com/skills/reggiechan74/tenant-credit-analyst

---


# 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**:
1. Calculate DSCR: NOI = $180,000, DSCR = $180,000 ÷ $80,000 = 2.25 (Strong)
2. Current Ratio: $420,000 ÷ $280,000 = 1.5 (Acceptable)
3. Debt-to-Equity: $500,000 ÷ $300,000 = 1.67 (Moderate)
4. Revenue trend: Year 1: $2M, Year 2: $2.2M, Year 3: $2.5M (Growing)
5. 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**:
1. DSCR: Negative NOI (losses), DSCR = N/A
2. Current Ratio: $1.2M ÷ $300K = 4.0 (Strong liquidity from equity raise)
3. Debt-to-Equity: $300K ÷ $900K = 0.33 (Low leverage)
4. Cash burn: $50K/month, 24 months runway remaining
5. 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**:
1. DSCR: Was 2.5, now 1.3 (declining but still acceptable)
2. Current Ratio: Was 2.0, now 1.4 (tight liquidity)
3. Revenue: Declined 15% year-over-year
4. Net Income: Positive but down 40%
5. 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**:
1. Parent DSCR: 3.5 (strong)
2. Parent Current Ratio: 2.2 (strong)
3. Parent Debt-to-Equity: 0.8 (conservative)
4. Parent Net Worth: $15M (> 10x annual rent)
5. 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**:
1. Declining revenue (3 consecutive years)
2. Unprofitable (net loss)
3. Negative working capital (current ratio < 1.0)
4. Over-leveraged (D/E 4.5)
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)