Covenant Strength Calculator
See what a stronger tenant covenant is worth in capital value by comparing the same commercial rent capitalised at two different investment yields.
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Two identical buildings with identical rents are worth different amounts if one is let to a government department and the other to a new business with no accounts. The rent is the same; the certainty of receiving it is not, and investors price that difference through the yield.
Because value is income divided by yield, a two-point yield difference on the same rent can be a quarter of the building's value. That gap is what a landlord is buying when they accept a lower rent from a stronger tenant.
The calculation
Each value is the same rent divided by its yield. The difference is what the market pays for certainty of income, and expressing it as a share of the stronger value shows how much of the building worth rests on who is paying the rent.
Worked example
A rent of 60,000 capitalised at 6% for a strong tenant is worth 1,000,000. The identical building let to a weak covenant at 8% is worth 750,000. The tenant credit is worth 250,000 — a quarter of the value — on exactly the same rent.
Unexpired term matters as much as credit
A strong tenant with eighteen months left is not the same asset as a strong tenant with fifteen years. Yields reflect both, and value falls as a lease runs down toward its expiry even when the tenant is impeccable.
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Create your free property pageFrequently asked questions
What makes a strong covenant?
Audited accounts showing profitability and net worth several times the rent, a long trading history, and where relevant a parent company guarantee. Government and large listed occupiers sit at the top; new entities with no accounts at the bottom.
Should I accept a lower rent from a stronger tenant?
Frequently yes, because the yield improvement can add more to capital value than the rent reduction costs in income. Run both through this calculator before deciding on rent alone.
Can a guarantee substitute for a weak covenant?
Often, if the guarantor is genuinely strong and the guarantee runs for the lease term. A rent deposit helps too but covers only a few months, so it improves the yield far less than a proper guarantee.
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