A credit tenant is a type of real estate tenant that has received a positive rating from either Standard and Poor's or Moody’s rating agencies. This rating tells potential investors the financial health of the rated company. These ratings are a comparative tool used by investors, banks and real estate companies to determine financial health of a company. By renting to a credit tenant, you can sometimes leverage the rating of your credit tenant.
If you have property you rent or lease to a credit tenant, you can use the leverage from credit tenant leases for different kinds of capitalization. Banks and other financial institutions view your credit tenant as a long-term source of funding or capital, especially if you have a long-term lease with the credit tenant. According to the “Principles of Finance,” credit tenants also attract other tenants to large-scale commercial projects. This can lower your property's overall vacancy rate.
The rating awarded to your credit tenant determines the value of your credit tenant for purposes of capitalization and leverage. Moody’s and S&P do not identify all ratings as positive. Moody’s considers Aaa, Aa, A and Baa positive ratings for credit tenants. Standard and Poor's, on the other hand, considers AAA, AA, A and BBB positive ratings for credit tenants. Moody’s and S&P issue other ratings. However, most investors, owners and appraisers do not consider these other ratings positive.
Credit Rating Changes
Many macroeconomic and microeconomic variables affect a credit tenants rating. On a macroeconomic level, changes in the overall economy, including inflation, recessions and changes to tax policies, can cause the rating of a credit tenant to increase or decease. On a microeconomic level, gains or losses, debt levels and spending levels of the individual credit tenant can adversely or positively affect a credit tenant's rating.
Are Credit Tenants Guaranteed?
Moody’s and S&P provide ratings based on the opinions of analysts about the financial health of the credit tenants. As opinions, the ratings agencies do not offer guarantees about the ratings. As such, it is possible for a credit tenant with an AAA rating to become bankrupt and default on capital tenant lease obligations. However, having a credit tenant with a high rating can, nonetheless, provide you with an asset that you can leverage. Leveraging a capital lease can allow you to expand or to seek additional funding from financial institutions.