Checking Identity, Credit of Tenants and Guarantors

Q Before I let a prospective tenant sign my lease, I want to check its background to verify its identity and creditworthiness. What is the best way to conduct identity and credit checks?

A It is good practice to conduct identity and creditworthiness checks not only on tenants, before they sign your leases, but also on guarantors, before you accept their guaranty, says New York attorney Robert Roth, who has 27 years of commercial leasing and management experience. Checking identification is more important now than ever, as many people are falling victim to identity thieves. The person negotiating on the other side of the table may not be the person he or she claims to be. Also, finding out a tenant's and guarantor's credit rating is key to deciding whether you want the tenant to sign your lease and how much security you should ask for, adds Roth.

Unfortunately, many owners and managers give identity and creditworthiness checks short shrift, and that practice could have disastrous consequences. Owners and managers need to act more like banks when reviewing the identity and creditworthiness of prospective tenants and guarantors, Roth says. For instance, you can't lease a car for more than $200 per month without undergoing an identification and credit check. But Roth has seen owners rent spaces to tenants in multi-year, multimillion dollar leases without inquiring about the tenant's identification and credit information—and that doesn't make sense, he notes.

Bear in mind that checking the identity and creditworthiness of a prospective tenant and a guarantor will vary somewhat, depending on whether the tenant or guarantor is an individual or a company, notes Roth. Here are some tips on how and what to check:

Identity checks. Do the following if the tenant or guarantor is:

• An individual. Ask the tenant and guarantor to show you any one of the following 10 documents, suggests Roth. Taken from a list provided by the Department of Homeland Security (DHS) and the U.S. Citizens and Immigration Services for the Employment Eligibility Form (I-9), these documents are extremely reliable forms of identification:

  1. U.S. passport (whether unexpired or expired);

  2. Certificate of U.S. Citizenship (Form N-560 or N-561);

  3. Certificate of Naturalization (Form N-550 or N-570);

  4. Unexpired foreign passport, with the I-551 stamp or attached Form I-94 indicating unexpired employment authorization;

  5. Permanent resident card or alien registration receipt card with photograph (Form I-151 or I-551);

  6. Unexpired temporary resident card (Form I-688);

  7. Unexpired employment authorization card (Form I-688A);

  8. Unexpired reentry permit (Form I-327);

  9. Unexpired refugee travel document (Form 1-571); or

  10. Unexpired employment authorization document issued by the DHS that contains a photograph (Form I-688B).

• Business entity. If the tenant or guarantor is a business entity, such as a corporation, partnership (general, limited, or limited liability), or a limited liability company, the documents you will need to see differ from those you ask an individual to show.

For example, if the company is “domestic”—that is, organized to do business in your state—make sure the company has been properly organized as the type of business entity it is representing to be and has not been dissolved. To do that, check with your state's secretary of state's office to find business documents—including organizational documents—the tenant and guarantor filed there. Your secretary of state's office may have an online database of business filings, but don't rely on it unless it is up to date. For example, the New York Secretary of State's online database of business filings is not always well maintained or up to date, says Roth. He prefers using a professional search firm—such as Blumberg Excelsior (www.blumberg.com/corporate_services/d.html)—to conduct a thorough search for business filings within a secretary of state's office.

Be aware that if the tenant or guarantor is a general partnership, it may not be required to file any documents with the secretary of state's office. In that case, ask the tenant or guarantor to give you a partnership agreement that is still in effect, advises Roth.

If the company is “foreign”—that is, organized under the laws of another U.S. state or country—require proof that the company is authorized to do business in your state, says Roth. Check your secretary of state's office for any filings the foreign entity has made. For example, in New York a foreign corporation must file an “Application for Authority” to do business in the state. Again, you may want to rely on a professional search firm to find such filings. Ask the tenant or guarantor of a foreign general partnership to give you a partnership agreement that is still in effect, adds Roth.

Credit checks. To thoroughly check the tenant's and guarantor's credit, do the following:

• Individuals. If the tenant or guarantor is an individual, ask for his Social Security number. If he supplies a Social Security card, verify that it is authentic and not being used by anyone else, says Roth. There are professional companies that can help you make such a verification, he says. For example, for a small fee and with a release, Fidelifacts (www.fidelifacts.com) can verify that a Social Security number belongs to the person claiming it and that no one else has used the number, he says.

Next, get credit reports from the three major credit reporting agencies (Experian, Equifax, and TransUnion), because the credit reports may differ among the agencies, says Roth. Negative information on the credit reports—such as delinquent payments—should raise red flags.

Also, get a “FICO” score for the tenant and guarantor from Fair Isaac Corporation (www.fairisaac.com/fic/en), advises Roth. The score ranges from 300 to 850 and ranks consumers according to the likelihood that they will pay their bills on time, he explains. A good-credit individual will have a high score.

Then, check whether the tenant and guarantor have been involved in any lawsuit that could affect their ability to pay your rent, says Roth. For instance, a minor slip-and-fall lawsuit against the tenant may not affect the tenant's ability to pay rent, especially if the tenant is adequately insured, he notes. Find out whether the tenant or guarantor has been convicted of a felony, has filed for bankruptcy, has not paid a court judgment, or has previously sued you or your predecessor. Ask the tenant and guarantor to disclose their court involvements. Their credit reports may also shed light on their past legal troubles.

Finally, get references from the owners of spaces the tenant is currently, and has previously, occupied, advises Roth. Speaking with those previous owners can help you discover whether the tenant has a history of meeting its lease obligations and paying its rent on time, he explains.

• Business entities. If the tenant is a business entity, find out more about its financial structure. Roth notes that you must determine whether the tenant is a shell corporation that has no assets, a closely held corporation operating as the “alter ego” of its shareholders, or a company based outside the United States, whose assets would be hard to reach. In any of those situations, getting a guaranty to protect your interests is vital.

Ask the tenant (and the guarantor, if it is a corporation) for its Internal Revenue Service's Employer Identification Number. Verify this number in the same way that you would verify a Social Security number, says Roth.

Get a Dun and Bradstreet Comprehensive Report (D&B) that evaluates the tenant's and guarantor's financial stability, advises Roth. This report is compiled by using Dun and Bradstreet's proprietary statistical scoring.

The D&B report will:

• Reveal whether the tenant has enough assets to pay you;

• Compare the tenant to other companies in the same industry;

• Check the business background of the tenant's owners;

• Check how many times the tenant has moved, and where to; and

• Review public records to see whether the tenant is involved in any lawsuits.

Finally, don't forget to ask the tenant and guarantor to give you their most recent certified financial statement prepared by a certified public accountant, as well as their business plans, says Roth.

CLLI Source

Robert Roth, Esq.: robert.roth@gmail.com.