How CAI’s Tenant Vetting Process Sets a New Standard in the Industry

The COVID-19 pandemic, rapid inflation, supply chain disruptions, unprecedented interest rate hikes, and geopolitical conflicts have reshaped the commercial real estate landscape. Over the past several years, the way people live, work, and operate businesses has fundamentally changed. These events have served as a wake-up call for many market participants.

In this volatile environment—particularly within the single-tenant net lease space—the importance of rigorous tenant underwriting has never been more pronounced. Tenant quality today plays a critical role not only in income stability but also in long-term asset performance.

CAI Investments is an experienced asset manager, developer, and private placement sponsor that is setting new industry expectations through a disciplined, comprehensive approach to tenant underwriting.

The Importance of Tenant Vetting in Single-Tenant Investments

The Foundation of Stability

Tenant strength is foundational to single-tenant investments, supporting consistent rent payments and lease compliance. However, what is often overlooked is that even when a tenant remains current on rent, a deterioration in tenant strength can create meaningful secondary risks.

Key areas impacted by tenant quality include:

• Exit Proceeds: If a tenant’s financial or operational outlook weakens between acquisition and disposition, exit valuations can be materially impaired. Strong, creditworthy tenants typically support higher sales proceeds by reducing perceived risk.
• Ability to Raise Capital: Tenant strength plays a pivotal role in capital formation. Properties leased to strong tenants tend to attract greater investor and lender confidence, making capital raises more efficient and cost-effective.
• Lease Renewals: Vacancy costs, tenant improvement allowances, and broker fees often stem from non-renewals. Historically, tenants with strong financial profiles are more likely to renew leases and absorb rent escalations.
• Liquidity: During periods of market volatility, assets with strong tenants benefit from a “flight-to-quality” dynamic. Increased demand for predictable income streams enhances liquidity, even in challenging markets.

Key Takeaway: A well-positioned property with a strong tenant and favorable lease terms lays the groundwork for stable DST performance.

CAI’s Rigorous Underwriting and Acquisition Strategy

CAI’s underwriting process evaluates tenant risk across financial, operational, and industry-specific dimensions. Like many sponsors, we analyze earnings, balance sheet strength, cash flow, and financial flexibility. Beyond this baseline, we seek a deeper understanding of each tenant’s business model, including:

• Sources, composition, and quality of revenue
• Potential opportunities for sustainable growth
• Underlying cost structure
• Effectiveness of pricing strategies
• Stability versus volatility of income streams

In addition to financial analysis, CAI places significant emphasis on the industry fundamentals in which a tenant operates. Industry dynamics can materially affect a tenant’s long-term viability if not fully understood.

For example, tenants operating in the technology sector face constant innovation and disruption, where rapid advancements—particularly in artificial intelligence—can quickly render existing business models obsolete.

To assess industry-level risk, CAI considers:

• Risk of industry obsolescence
• Current and future regulatory environment
• Exposure to interest rate changes
• Dependence on consumer confidence
• Sensitivity to global trade fluctuations

Key Takeaway: CAI underwrites the full tenant profile — financials, industry dynamics, and business strategy — to ensure alignment with our investment philosophy.

Case Study: The Wisconsin-Illinois Border Manufacturing Facility

CAI acquired the vacant 1.5-million-square-foot former Motorola manufacturing facility in Harvard, Illinois, from the U.S. Marshals. The objective was to reposition a dormant asset by securing a high-quality tenant that met CAI’s underwriting standards for recession resistance, industry security, and long-term viability.

CAI successfully executed a 20+ year lease with U.S. Medical Glove Company (USMGC).

In evaluating USMGC, CAI applied a holistic underwriting approach that assessed both tenant-specific financials and broader industry considerations

Underwriting Considerations: 

Tenant Financial Strength and Industry Resilience

CAI assessed USMGC’s financial stability, growth potential, and adaptability within the PPE manufacturing sector. While USMGC did not have a long operational history, a key consideration was the substantial support USMGC received from the Department of Health and Human Services (HHS) and the Department of Defense (DoD). These grants underscored USMGC’s strategic importance to national health security and reinforced its position within a recession-resistant industry that experienced heightened demand during the COVID-19 pandemic.

Industry Dynamics and Future-Proofing

CAI recognized the importance of onshoring critical PPE manufacturing to reduce reliance on foreign supply chains—a national regulatory priority. USMGC’s commitment to American labor, domestic materials, and advanced in-house technologies positioned the company to withstand future regulatory and market shifts.

Operational Stability and Technological Integration

USMGC’s re-engineering of the glove manufacturing process, including proprietary machinery development and onshoring chemical production, demonstrated operational control and technological resilience.

Regulatory Environment

CAI evaluated favorable regulatory tailwinds, including the Buy American Act and the Berry Amendment, which prioritize domestic manufacturing of essential goods. These policies create meaningful competitive advantages for companies like USMGC.

Key Takeaway: Comprehensive underwriting validated USMGC as a long-term, government-supported, recession-resistant tenant.

Why CAI’s Single-Tenant Model is Superior

CAI’s focus on single-tenant net-leased properties, combined with rigorous tenant vetting, is designed to mitigate risk and enhance stability. By evaluating tenant financial strength, industry resilience, and long-term viability, CAI seeks to ensure that only recession-resistant and technology-resilient tenants occupy its properties.

This approach can:

1. Reduce vacancy risk
2. Minimize lease default exposure
3. Support predictable cash flows

By aligning with tenants that demonstrate adaptability and growth potential, CAI seeks to enhance property desirability, supports higher valuations, and improves exit strategies. CAI’s model is designed to capture long-term value through secure, reliable tenant partnerships.

In summary: CAI’s single-tenant strategy prioritizes stability, liquidity, and long-term value creation.

What this Means for Advisors

CAI’s tenant vetting and acquisition strategy establishes a new benchmark for single-tenant investments. By extending due diligence beyond traditional financial analysis to include industry resilience and future adaptability, CAI redefines disciplined tenant selection.

CAI’s commitment to comprehensive underwriting positions us as a preferred partner for financial advisors and their clients.

Investment advisors are encouraged to explore Manufacturing Essential Asset I, DST and the advantages of CAI’s single-tenant investment opportunities to better understand how CAI’s tenant-focused model may support portfolio stability and sustained value creation.

Key Takeaways

• Tenant vetting plays a critical role in the stability of single-tenant net lease investments
• Tenant strength impacts exit proceeds, capital raising, lease renewals, and liquidity
• CAI evaluates tenants across financial, operational, and industry-specific dimensions
• Industry dynamics and regulatory environments can materially affect tenant viability
• Case studies demonstrate how disciplined underwriting may help mitigate long-term risk

Frequently Asked Questions (FAQs)