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Reviewing Retail Loans will clearly demonstrate that there are numerous sub-classifications of retail properties, each one of the retail property types have different underwriting guidelines and requirements.
THE TYPE OF RETAIL LOCATION AND ITS DESIRABILITY INFLUENCE RETAIL RENTAL REVENUE
As with other investments desirability is often a function of location but also a function of other Demand Factors including...
Mix of anchors
Traffic count or ADT's
Area demographics
Mix and type of stores
Amenities
Quality of construction
Perception of the market
The rental income from the center, no matter what type of tenant comes from base rent and percentage rent. That rent is the cash flow needed to justify the retail loan for the investor.
In exchange for a lower base rent some tenants opt to pay the landlord a contingent rent called the "percentage rent".
Retail landlords calculate percentage rent by multiplying defined sales by specified percentages.
Anchored Retail (with national tenant as anchor)
Includes Grocery Anchored Retail, Other Anchored Retail, Strip Center – Anchored, Mall – Super Regional, Mall – Regional, Specialty Center, Other Retail
Maximum LTV - 75% to 80% Maximum Amortization – 25 to 30 years Minimum DCR - 1.25x Minimum Vacancy Reserve – the greater of actual or market vacancy; typically 7% to 10 %< br> Minimum Tenant Improvement and Leasing Commission Cost TI/LC) - the greater of actual or $0.70 per square foot
Capitalization Rate – use market-driven cap rate Typically 9% to 11%
Unanchored Retail (complimentary tenant mix)
Includes Unanchored Retail, Strip Center – Unanchored, Single Tenant Non-Investment, Outlet Center, Other Retail
Same as above for Anchored Retail
Freestanding Retail (credit tenant with sales history)
Same as above for Anchored Retail except Minimum DCR - 1.40x
Single Tenant Investment (Credit Tenant Lease)
Tenant should be rated “Investment Grade” and have revenues of $25,000,000 and a net worth of $5,000,000 Maximum LTV – up to 100% Maximum Amortization – 20 to 30 years (lease should extend 5 years beyond the loan term)
Minimum DCR – 1.000x to 1.003x Minimum Tenant Improvement and Leasing Commission Cost (TI/LC) –typically zero
Capitalization Rate – use market-driven capitalization rate; typically 7% to 9%
For a No-Obligation Professional Analysis for Retail Loans please click here.
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