Assess Every Tenant’s Creditworthiness
Tenant credit quality drives the reliability of a property’s cash flow. A $245,000 lease to a bank and a $245,000 lease to a three-year-old restaurant group produce the same line in the rent roll and very different outcomes in a downturn. Most buyers assess credit inconsistently: they check the big names, assume the rest, and skip anything unrated.
This page covers how a buyer scores tenant credit, how default probability is estimated and used, and where Moraine fits. If you searched for a tenant default probability calculator, the arithmetic is in the sections below.
Step 1: Build the Tenant List With Evidence
Credit work starts from facts in the documents: legal tenant name (which can differ from the trade name on the rent roll), rent, expiration, renewal and termination options, security deposit, and any guaranty and who gave it. Lease files often show that the entity on the lease is a single-purpose subsidiary of the brand you recognize, and the guaranty is the only credit support behind it.
Moraine reads the rent roll and leases and returns these items with page-level citations, so you can see where each came from and where documents conflict. That is the input to everything below.
Step 2: Assess Credit by Tenant Type
| Tenant type | What to review |
|---|---|
| Rated public company | Agency rating and outlook, latest 10-K and 10-Q: leverage, interest coverage, liquidity, upcoming maturities |
| Unrated public company | Same filings; compute ratios and a distress model such as Altman Z (below) |
| Private company with a guaranty | The guarantor’s financials, not the tenant’s; check what the guaranty actually covers and for how long |
| Private company without a guaranty | Tenant-provided financial statements, security deposit or letter of credit, years in business, sales reports for retail |
| Franchisee of a strong brand | The franchisee’s credit, not the franchisor’s |
Lease structure matters as much as the tenant. A tenant with 10 years remaining and no termination option is a different exposure than one with 10 years remaining and a termination right in year 3.
Step 3: Turn Credit Into a Default Probability
Agencies publish historical cumulative default rates by rating category. The figures below are rounded and approximate, from S&P Global Ratings’ long-run average cumulative default rates by rating (corporates, 1981 onward; see the S&P Global Ratings track record and S&P’s annual global corporate default and rating transition study). Confirm against the latest edition before using them in a memo.
| Rating category | Approx. 1-year default rate | Approx. 5-year cumulative default rate |
|---|---|---|
| Investment grade (AAA to BBB) | Under 0.2% | About 0.1% to 2% (AAA lowest, BBB highest) |
| BB | About 0.5% | About 7% |
| B | About 3% | About 15% |
| CCC/C | About 25% or more | About 45% |
Two cautions. First, these are averages across all issuers and all economic conditions; defaults cluster in recessions. Second, rating-category bands are not interchangeable with a 0-5% “stable” label: an investment-grade issuer’s one-year default probability is a fraction of one percent, so a model that reports 2% to 5% for a bank tenant is describing something much weaker than investment grade.
For unrated tenants, you place the tenant in the nearest rating-equivalent bucket using the financials, then use that bucket’s rate. Most small tenants land in B-equivalent or worse.
Altman Z-score as a screen for public companies
Altman Z combines five ratios: Z = 1.2(working capital / total assets) + 1.4(retained earnings / total assets) + 3.3(EBIT / total assets) + 0.6(market value of equity / total liabilities) + 1.0(sales / total assets). Above 2.99 is the safe zone, 1.81 to 2.99 is the grey zone, and below 1.81 signals distress. The original model was fitted to public manufacturers; for retailers and service companies use the Z” variant, which has different coefficients and cutoffs.
Example with illustrative ratios: 1.2(0.15) + 1.4(0.20) + 3.3(0.08) + 0.6(0.9) + 1.0(1.1) = 0.18 + 0.28 + 0.264 + 0.54 + 1.1 = 2.364. That is the grey zone: not distressed, but not a name to underwrite at investment-grade pricing.
Step 4: Convert Probability Into Rent at Risk
Probability alone does not tell you what to do. Multiply it by what a default would cost.
Expected loss = default probability x loss if default.
Illustrative example: a tenant pays $185,000 a year. If it defaults, you assume 12 months of vacancy plus $40,000 of tenant improvements and commissions to re-let, so the loss is $185,000 + $40,000 = $225,000.
| Credit assumption | 5-year default probability | Expected loss |
|---|---|---|
| BBB-equivalent | 1.3% | 0.013 x $225,000 = $2,925 |
| B-equivalent | 15% | 0.15 x $225,000 = $33,750 |
The same space carries more than ten times the expected loss if the tenant is B-equivalent rather than BBB-equivalent. That is the number to compare with the price difference and any credit support (deposit, letter of credit, guaranty) you can negotiate.
Portfolio view: how much rent has no credit information?
Sample rent roll, for illustration:
| Tenant group | Annual rent | % of total |
|---|---|---|
| National Bank Corp (rated, investment grade) | $245,000 | 28% |
| Regional Medical Group and Professional Services (unrated, financials reviewed) | $263,000 | 30% |
| Tech Startup, Local Retailer, small tenants (unrated, no financials) | $367,000 | 42% |
| Total | $875,000 | 100% |
The finding is that 42% of rent rests on tenants nobody has credit-checked. That tells the buyer where to spend diligence time: request financials from the largest unrated tenants first, and check whether the 28% anchor has a termination option that makes the rating irrelevant.
Step 5: Use the Result
- Pricing: two retail centers at $25/SF are not equal if one has a rated anchor and the other relies on local operators; the second warrants a wider cap rate, a larger vacancy and credit-loss reserve, or both.
- Negotiation: ask for security deposits, letters of credit or guaranties from weaker tenants as a closing condition.
- Underwriting: use the bucket’s default probability to inform credit loss and downside scenarios.
- Lender and IC questions: the file should show which tenants were reviewed, on what evidence, and which are unrated.
Re-check if the rent roll or tenant mix changes before closing. A qualified underwriter should review the conclusions before IC.
Where Moraine Fits
Moraine is underwriting and diligence software for office, retail and industrial acquisitions. For tenant credit it does the document work: reading the rent roll and leases, listing tenants, rents, expirations, options and security terms with page-level citations, and flagging conflicts between documents. Your team supplies the credit view (ratings, filings, tenant financials) and Moraine’s source-linked model carries the result into the cash flow.
Moraine builds the first draft from your documents; an underwriter reviews it before IC. Property-level due diligence is $3,000 per property, and a free 14-day evaluation is available with no card. See the best tenant credit analysis tool comparison for CRE, the best AI due diligence platform for CRE, and due diligence software pricing.
Frequently Asked Questions
How do you estimate a tenant’s default probability?
Start with a published rating if one exists and map it to historical cumulative default rates from the agencies’ annual default studies. For unrated tenants, review financial statements, any guaranty, and the tenant’s history at the location, then place the tenant in a rating-equivalent bucket by judgment. The result is an estimate to price against, not a prediction.
What is a good default probability for a CRE tenant?
Investment-grade issuers have historically defaulted at well under 1% in a year and at low single digits over five years. Sub-investment-grade issuers default at a multiple of that, and the weakest categories at rates in the tens of percent. Use the current agency default study.
How is this different from ordering credit reports?
Credit reports are priced and ordered per tenant, so teams skip them for small tenants. Order reports for the few tenants carrying most of the rent, and use lease data and public information for the rest.
How do you assess a private tenant’s credit?
Ask for what a lender would: two to three years of financial statements, a guaranty, and a security deposit or letter of credit. Check years in business at the location and sales reports for retail. Treat anything unverified as unrated.
Where do you find tenant credit data?
Agency ratings for rated issuers, SEC filings for public companies, lease files for guaranties and deposits, and tenant-provided financials for everyone else.
What does Moraine do for tenant credit?
It extracts the tenant list, rents, expirations, options, guaranties and deposits from the rent roll and leases with page-level citations. It is not a credit rating or a substitute for a credit report; an underwriter makes the credit call.
Related: Best Commercial Real Estate Due Diligence Software | Due Diligence Software Pricing Comparison