Retail 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 unanchored strip centers during economic slowdowns.  Therefore, some of the best loan products plus industry pricing are available for these properties.  The loan underwriting will focus on the location, historic economic performance, Store sales, historic occupancy, co-tenancy requirements, 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, well occupied properties.  If more leverage or you need to borrow up to 80% to 85% of the value then it may be possible to obtain a mezzanine loan that will come in behind the senior loan (first mortgage).  For more information about a mezzanine loans click here.

Shadow Anchored:  This property type is considered slightly risker than an Anchored center because the anchor tenant is not part of the collateral.  The lenders will normally max out at 70% – 75% loan to value.  As with the Anchored Retail property, the loan underwriting will consider the historic performance of the property, the submarket trends, lease roll over exposure.  Additional leverage to complete the transaction might be possible by placing a mezzanine loan on the property in order to increase the overall loan amount.

Unanchored Strip Center or Neighborhood Center:  Some institutional lenders will not consider this property type while others will only consider this property type.  The two opposing schools of thought are, “we must have an anchor to draw the customers to the shopping center.”  Whereas the other school of thought is, should the anchor tenant go dark, the rest of the shops will most likely struggle.  If the center has a good history, these lenders welcome the opportunity to finance these properties.  Historic economic performance, submarket data is reviewed, lease expirations of existing tenants (roll over) 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 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-
    3. Moody’s Baa3:
    4. Fitch BBB-
    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.

  • If you are trying to obtain maximum loan dollars and you have established the tenant carries an investment grade rating, you can back into the maximum loan dollars. Determine what landlord expenses will be.  If a triple net lease (NNN) with no landlord obligations you can use the Excel model (click here) plug in the actual monthly payment, then the anticipated interest rate, determine the number of months remaining under the lease after the loan closes and type this into the Excel Model which will provide you with the present value of the stream of lease payments over the remaining lease term at the given interest rate.  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.
    1. Term (remaining lease term) 20-years or 240 payments
    2. Funds available for debt service ($29,166.67) on a month basis.
  • Anticipated interest rate 5.0%
  1. Present value will equal: $4,419,488.80
    1. 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 and 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.
  • 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.
  • 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 permits the tenant to cancel the lease prior to the actual lease expiration in the event of a partial or all of the lease premise be taken through condemnation proceedings (example, road widening).  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 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.
  • 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.
  • 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 Walgreens the 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.  The lender will underwrite the lease term to the early termination date (25-years).
  • 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.
  1. 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 lender want the amortization to align with the lease maturing, others will permit a balloon balance that can work-out to be the unimproved land value, or 7-years beyond the lease term.  All of the lenders will want to study the financial statement on the tenant and they will want to see sales history if available.  Loans for non-recourse loans on this property type start at $1,000,000.  If you do not have financial statements on the tenant or 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 move around 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.
  • If you are in the early stages of entering a lease with a national company or a government tenant, we might be able help by asking the tenant to close some gaps in the lease and 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.  So, 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 generally 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 in the way Americans shop puts significant strain on Regional Malls. Many of the anchors are under significant financial stress, the smaller tenants have moved to Life Style centers or often have just gone out of business.  We do find in each major city one or two Regional Malls still show excellent occupancy and sales.  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:  I recommend a brief conversation outlining the transaction and the type of loan you are looking for followed up with a preliminary loan package:

  • Photos of the subject
  • 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.