Shopping Center Loans

Anchored Retail:

Within the Retail Sector this is one of the most sought-after property types in the over $3 million range.  These properties as a Class, generally perform better than un-anchored strip centers during economic slowdowns.  Therefore, some of the best loan products are available for the anchored shopping center loans.  The loan underwriting will focus on: 1) the location.  2) historic economic performance. 3) store sales 4) historic occupancy 5) co-tenancy requirements. And 6) remaining lease term for the Anchor Tenant(s).  No consideration is given to the renewal options that have not been exercised.  Institutional lenders will lender up to 75% on well located and well occupied properties.  However, if you need to borrow up to 80% of the value look for a mezzanine loan.  A mezzanine loan will come in behind the senior loan (first mortgage) in shopping center loans.  For more information about a mezzanine loans click here.

Shadow Anchored:

This property type is slightly more risky than an anchored shopping center because the anchor tenant is not part of the collateral.  As a result lenders will normally max out at 65% – 75% loan to value for these type of shopping center loans.  The loan underwriting will consider the historic performance of the property, the sub-market trends, lease roll over exposure.  Additional leverage to complete the transaction might be possible with a mezzanine loan.

Unanchored Strip Center or Neighborhood Center:

Some institutional lenders will not consider this property type while others will only consider this property type.  Therefore, two opposing schools of thought are, 1) “we must have an anchor to draw the customers to the shopping center.”  and 2) if the anchor tenant goes dark, the rest of the shops will most likely struggle.  If the shopping center has a good history, lenders will welcome the opportunity to provide a long term fixed rate shopping center loans. Historic economic performance, sub-market data is reviewed.  The lease expiration’s of existing tenants (rollover) are examined and lease rate trends are reviewed.   Leverage and terms for these generally mirror that of the Shadow Anchored Centers described above.

Big Box Retail or Power Centers:

Most lenders will consider this property type.  The focus will be on the lease term and financial strength of the tenants.  Many of the smaller tenants will have co-tenancy requirements.  Leverage for these will be between 70% and 75% with additional leverage via a mezzanine loan available up to 80% for these shopping center loans.  For more information about a mezzanine loans click here.

Single Tenant:

Below find discussion about the various types of Single Tenant loans available.

1. Investment Grade Tenant:

   1. Investment grade tenant. What is an investment grade credit rating? The lowest investment grade rating issued by three of the largest rating agencies are as follows:
   2. Standard and Poors (S&P) BBB- https://www.standardandpoors.com
   3. Moody’s Baa3: https://www.moodys.com
   4. Fitch BBB- https://www.fitchratings.com
   5. If the “trend” is negative and the Tenant Company is at the low end of the rating scale the lender might not consider the tenant as investment grade based on the concern if the negative trend continues the credit rating might be lowered in the near future.

You can sign up for free to gain access to the rating agencies above to investigate a company’s actual ratings if any.   The most common reason for a company to carry public credit ratings is to help lower the cost of borrowing money. Most companies do not have public credit ratings.

Maximize Loan Dollars:

• If you are trying to obtain maximum loan dollars for a tenant that carries an investment grade rating, you can back into the maximum loan dollars. Determine what landlord expenses will be. Subtract the landlord expenses from the base rent to arrive at the net rent.  We have a free Excel based model to help you size the loan.  Call or email for this free Excel modeling tool. You can also back into the loan amount by plugging in the loan interest rate (current interest rates). Next plug in the monthly rent available for debt service in the payment key.  Then plug in the number of months remaining under the primary lease term for the loan amortization and now solve for present value (PV).   For example if a Walgreens has 20-years left on their primary lease term (before any option for early termination) and the monthly NNN rent payment is $29,166.67 and you know the rate on the loan will be 5% you can solve for the present value of this stream of payments.

• Sample economics:

  1. Term (remaining lease term) 20-years or 240 payments
  2. Funds available for debt service ($29,166.67) on a monthly basis.
  3. Anticipated interest rate 5.0%
  4. Solve for Present value –  will equal: $4,419,488.80

Landlord Obligations

• Most newer Walgreen leases have provisions that the landlord must warrant the construction for the first couple of years. Additionally, some of the leases require the landlord to maintain the parking lot, roof, foundation and roof.  These landlord obligations vary from property to property.  The lender will determine the estimated costs of landlords obligations.  The they will establish a reserve, collecting these from the incoming rents, and set these funds aside.  So, if the lender estimates the landlord costs at 3% of the base rents then you should reduce the Funds available to service the loan (2) ii. above by 3% ($29,166.67 times 3% = $875.00) before running this through the present value model.

RVI Insurance:

• Need additional loan proceeds? More than the amount shown above (2) iv? It may be possible to increase the loan amount by purchasing Residual Value Insurance (RVI) at the time you close the loan. You can end up having a balloon balance at the end of the remaining lease term.  The RVI guaranties the lender (or bondholder) that the balloon balance will be paid off.  How much additional in proceeds can you obtain?  This turns into a real estate specific issue.  What will the value of the real estate be worth 20-years in advance vacant?  Many times the building is given little to no value and the RVI issue might consider 50% of the unimproved land value.  Once again this is a case by case method and not a formula that one can apply to fit each property.  The RVI insurance can run between 3.5 points to 5 points of the RVI amount (balloon balance), paid at the time of the loan closing.  The smallest RVI amount is normally $400,000.

GAP Insurance:

• Another step into obtaining maximum proceeds is to purchase specialized insurance that will protect the lender (bondholder) should the tenant exercise an early termination provision found in the lease for condemnation or casualty loss. You often see a provision within the lease that permit the tenant to cancel the lease prior to the actual lease expiration.  For example in the event of a partial or all of the lease premise be taken through condemnation proceedings.   The second most common provision allows the tenant to cancel should the building be damaged through a casualty loss (example fire or storm damage).  The lease will outline what events have to occur which would allow the tenant to terminate early.  The actual premium for this specialized insurance is a function of the loan amount, the actual language found within the lease.  We see premiums ranging from 65 basis points to 125 basis points of the loan amount, paid lump sum for the term of the loan at closing.

Bondable Lease Terms

• When you have an investment grade tenant, and you have plugged the provisions within the lease with the specialized insurance mentioned above and there are no other provisions that would allow the tenant to terminate early, you have converted the loan to a bondable transaction. That is the lender (bondholder) will receive their monthly payments no (assuming the tenant honors the lease) matter what happens.  This conversion to a bond structure allows lenders (bondholders) to treat this as a rated security and is generally booked within the lenders (bondholders) bond portfolio and not in the real estate loan portfolio.  The real estate loan portfolio often requires the lender not to exceed certain loan to value ratios while if treated as a rated bond the same lender can book the loan without specific consideration to the loan to value ratio.

Lease Options to Extend

• How does the lender look at the lease options? On single tenant transactions the lender will not give any credit for the extension option, the assumption will be the tenant will not renew.  For a lender to use extension option in the loan underwriting the tenant must formally exercise this option as required under the lease.  In the case of Walgreen’s newer leases are actually most often written for an initial lease term of 75-years with an early termination option at the end of the first 25-years.  Therefore, lender will underwrite the lease term to the early termination date (25-years).

Zero Cash Flow Mortgage

• If you go down the path of borrowing as much as possible and end up with very little to no net cash flow (a/k/a as a Zero Cash Flow Mortgage), be sure to obtain professional advice on how to address you income tax obligations. We are not qualified to provide you with advice in the area of income tax. We do want you to be mindful of the potential Phantom Income.  If nearly all if not all of the rental income is being captured for loan payments (and reserves) you could end up with an income tax liability without any cash flow from the subject property to pay the income tax obligations.  This is why we recommend you seek professional advice before entering into a Zero Cash Flow mortgage.Non-Investment Grade Tenant or Limited time remaining on lease from an Investment Grade Tenant:

• These are real estate loans. The lender will focus on the underlying real estate, then the tenant and lease terms.  Some lenders require the loan amortization to align with the lease maturing.  Other lenders will permit a balloon balance.  Some lenders will limit the balloon balance to be no more than unimproved land value.  While other lenders often will go 7-years beyond the lease term to determine the balloon balance.  All of the lenders will want to study the financial statement on the single tenant and they will want to see sales history if available.  Non-recourse loans on single tenant real estate start at $1,000,000.  If you do not have financial statements on the tenant.  Or if the tenant is not financially strong you should assume the lender will require recourse or they will just pass on the loan all together.

• Maximum loan to value will range between 70% and 80% depending on the overall strength of the transaction.  Many very financially strong tenants do not provide public access to financial statements.

Lease Modifications

• If you are in the early stages of entering a lease with a national company or a government tenant, we might be able help.  We might be able to provide sample language we know from past experience with a lender they have agreed to modifications. These modifications could make a big difference on the type of loan you might otherwise be able to obtain. In conclusion when possible, bring us in early to study the lease terms that will be or have been presented to the tenant.

Regional Mall:

Multiple tenants with at least two full line departments stores.  In this day and age of Amazon and the buying power of the Internet we find the shift way from the Regional Malls.  Many of the Mall anchors are under significant financial stress.  Smaller Mall tenants have moved to Life Style centers.  In major cities one or two Regional Malls still show excellent occupancy and sales.  Thus, these Malls can demand favorable loan terms with leverage starting at 65% and amortization schedules to 30-years.   The lenders will want to understand the financial strength of the Anchor Tenants. The sales history of the tenants and co-tenancy requirements.  Can the anchor tenants go dark?  If yes, can the landlord recapture the space? How much advance notice must the Anchor tenant provide prior to lease expiration of their intent to renew?

How to proceed with the loan request for shopping center loans?  It is best to call outlining the transaction and the type of loan you are looking for followed up with a preliminary loan package:

• Photos of the subject property
• Loan Request – amount, amortization, term, recourse vs non-recourse
• Historic operating statements if available
• Rent Roll – Exact lease terms
• Indicate the equity you have in the property if less than 5-years ownership.
• If only a few tenants, financial statements and historic sales levels on the tenants would be helpful – if available.

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On our web site you can read about specific loan products: www.caffreyloans.com/loan-products, offered by Freddie Mac, Fannie Mae, HUD/FHA, Commercial Mortgage Back Securities (CMBS) and other loan products. Want more details on sample interest rates for apartment check out Interest Rates for Apartment Loans also on our web site: www.caffreyloans.com/apartment-loans.

Have a question please contact
Mike Caffrey
Telephone: (913) 402-7077
Mike@CaffreyLoans.com
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