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Credit Checks for Self-Storage Tenants: Preventing Bad Debt During COVID-19

Most self-storage operators don’t perform credit checks on new tenants, but the coronavirus pandemic could change that. As more cities enact legislation to restrict the industry’s ability to hold lien sales and collect bad debt, it might be wise to check a prospect’s credit scores before entering a lease.

Traditionally, when a self-storage tenant is late to pay rent, the facility operator can apply a lien remedy that encourages the customer to pay his debt or move out, or allows the operator to sell the goods and return the space to inventory. Payment problems are usually resolved within 90 days. Because this approach has been so effective over the past few decades, most operators don’t check their customers' credit before renting a unit. But the coronavirus pandemic has changed everything.

Some states and municipalities are placing moratoriums on landlord rent remedies. Los Angeles, for example, has imposed one on self-storage lien sales when the tenant's inability to pay is even marginally related to COVID-19. North Carolina and Oregon have limited the termination rights of all landlords, including self-storage operators. These new circumstances have raised the question as to whether it would be wise to check prospects’ credit scores before entering the lease.

A New Rental Process

Generally, self-storage operators have been reticent to check tenant credit as part of the application process, for fear that doing so would be bad for business. Some believe the risk of a rent default isn’t as financially significant in our industry as it is for other types of commercial real estate. The incremental cost of a credit check has seemed unnecessary for a business based on short-term, month-to-month rentals.

But with restrictions on landlord remedies now in place in some states, it could be the right time to consider credit checks as part of the rental process. Self-storage is behind the times in understanding tenant credit risk. Think about mortgages, credit cards and automobile financing—all that pricing is tied to credit scores. Why not storage rent? The data is clear that people with higher credit scores are less likely to miss a payment, while people with lower scores will have higher defaults rates. But credit checks aren’t just about renting to tenants with better credit. It’s also about pricing spaces correctly.

How It Might Work

Most self-storage operators offer discounts to new customers. In fact, providing the first month free has proven to be the industry's most effective special. However, not everyone who inquires about space is a good candidate for such an offer.

A credit check generally allows you to see what outstanding financial obligations a prospective tenant has. A customer with a 580 FICO score may be a good candidate for a rent special, while one with a 510 could be a risk. The first month free allows a customer to move into a 10-by-10 space for $25 or even less. A person with poor credit who moves in at such a low rate might not be able to pay $100 per month thereafter. Are you even willing to take a chance on a person with poor credit who pays the standard rent and fees at move-in?

If you’re concerned about your right to foreclose on tenants' stored property in the event of delinquency, you might want to be more selective in accepting new customers. You may also want to be more discerning about who’s eligible for rent specials. Checking a customer’s credit score during the rental process is something worth considering. It could even reduce the burden on staff to chase after tenants who don’t pay rent. Most important, fewer delinquencies and reduced lien sales will have a positive impact on facility revenue.

Note: This article was originally published in Scott Zucker’s “Legal Monthly Minute” newsletter.

Carlos Kaslow has provided legal consulting services to the nation’s largest self-storage and mobile-storage operators for more than two decades. He has written numerous articles on legal and insurance issues confronting the self-storage for industry publications. He can be reached at ckaslow@msn.com.

Scott I. Zucker is a founding partner in the Atlanta law firm of Weissmann Zucker Euster Morochnik & Garber P.C. and has been practicing law since 1987. He represents self-storage owners and managers throughout the country on legal matters including property development, facility construction, lease preparation, employment policies and tenant-claims defense. He also provides, on a consulting basis, advice to self-storage companies in the areas of foreclosure and lien sales, premises liability, and loss-control safeguards. To reach him, call 404.364.4626; e-mail scott@wzlegal.com.

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