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Page 10 — Retail Properties Quarterly — February 2015
NEW ADDITIONS
H&M
AMC Theater Remodel
TruFit Athletic Clubs
Bad Daddy’s Burger Bar
Southlands ER/Centura Health Facility
COMING SOON
McAlister’s Deli
Kay Jewelers
Sephora (Inside JCPenney)
Disney Store (Inside JCPenney)
6155 S. MAIN STREET • AURORA, CO 80016
Southlands Growing...Growing... is a great place to be!
A s we kickoff 2015, commer-
cial real estate continues
to display a healthy per-
formance. While market
strength alone may seem like
a good enough reason for institutions
to invest in commercial real estate,
the capital market has created addi-
tional incentive. Much like last year,
as interest rates remain low, institu-
tional portfolio managers are finding
commercial real estate yields attrac-
tive compared to other asset classes.
With the supply of capital exceeding
demand, commercial real estate
lending is expected to be vigorous
this year, and retail property owners
are fortunate to have a wide variety
of financing options available.
Even in this highly competitive
lending environment, lenders remain
selective. Appetites differ greatly
from lender to lender, especially
within the retail sector. Retail owners
who seek financing in 2015 need to
know what lenders are looking for.
After all, the most competitive loan
terms usually come from the lender
that most wants to win the business.
Life Companies
Life companies are well known for
being conservative lenders, and in
exchange for lending on low-risk,
stabilized properties, life compa-
nies offer the best available interest
rates in the marketplace. Generally
speaking, life companies prefer low-
leverage loans, usually not exceed-
ing 65 percent to 70 percent loan to
value. Furthermore, many life com-
panies will underwrite using internal,
above-market cap rates to account
for future market softness. Beyond
seeking conser-
vative deals, life
companies don’t
all evaluate retail
properties the same
way. These are a
few life company
hot buttons:
Anchored centers.
Many (but not all)
life companies
specifically seek
grocery- or drug-
anchored shop-
ping centers. They
will swing hard to
win this business.
Accordingly, retail owners should be
armed with tenant sales figures so
they can convey the strength of their
anchor. For a grocer, lenders want to
see sales figures that exceed at least
$300 per square foot, and $400 per
sf is considered good. Some lenders
also evaluate a tenant’s overall occu-
pancy cost by calculating the ratio
of total rent to gross sales. Ideally,
this percentage should be in the low
single digits.
Quality of tenant lineup. Life com-
panies are always sensitive to lease
rollover, however, they also pay more
attention than ever to the types of
retail users in occupancy (especially
for noncredit tenants). As e-com-
merce continues to gain popular-
ity, lenders strongly prefer tenants
whose products and services can’t
easily be purchased online. For exam-
ple, lenders favor restaurants, coffee
shops, health clubs, and hair and nail
salons, compared with clothing, shoe
and bookstores. They generally like
shop space ratios to be less than 35
percent of the total net rentable area,
including the anchors.
Loan per square foot. Since life
companies are conservative balance
sheet lenders (meaning they tend
to hold loans on their books for the
entire term of the loan), aside from
considering loan-to-value ratios to
measure leverage, lenders also are
focused on a metric called loan per
square foot. Generally, life company
lenders compete best if a requested
loan per sf is $200 or less.
CMBS Lenders
Commercial mortgage-backed secu-
rity lenders are the best option for
borrowers who seek maximum lever-
age and the lowest loan constants.
CMBS lenders underwrite using mar-
ket cap rates, and they aren’t afraid
of 75 percent leverage. Additionally,
although CMBS rates tend to be 20 to
50 basis points higher than life com-
panies, CMBS lenders usually can
offer longer amortization schedules,
making their overall loan constants
competitive. CMBS lenders also tend
to be the best option for financing
unanchored strip retail (because so
many life companies are focusing
on grocery- and drug-anchored cen-
ters), especially when a loan request
exceeds $150 per foot. Here are a few
important trends to know about the
CMBS market:
Improvements to loan servicing.
We’ve all heard horror stories about
the frustrating inefficiencies of CMBS
servicing in past years, however,
retail owners who have avoided
CMBS loans should consider taking a
fresh look. The CMBS market heard
these complaints and listened. Some
CMBS lenders are looking for mort-
gage banking firms who can service
the loans they originate. This allows
mortgage bankers to provide better
servicing and stand by their borrow-
ers for the duration of a loan.
Focus on timeline. CMBS lenders are
very focused on shortening the time
it takes to close a loan, making them
very competitive when it comes to
financing acquisitions. Once CMBS
lenders begin their process, they
want to close and race to securitiza-
tion. This translates to fast acquisi-
tions for borrowers; CMBS lenders
can close within 45 days. Also, as a
side note, CMBS lenders won’t shy
away from low going-in cap rates (as
long as the market justifies).
Banks and Credit Unions
Banks and credit unions deserve
a mention, as they actively lend on
retail properties. Because banks have
a lower appetite for long-term, fixed-
rate deals than life companies and
CMBS lenders, banks tend to com-
pete best for financing construction,
short-term loans and transitional
assets. Credit unions, on the other
hand, still will entertain long-term,
fixed-rate deals, however, they
require full recourse to the borrower.
Further, credit unions are not permit-
ted to charge prepayment penalties,
so they provide a very flexible exit for
borrowers who don’t mind signing
recourse.
Nonrecourse Bridge Lenders
Nonrecourse bridge lenders are
eager to finance transitional assets,
and due to the low supply of value-
Financial Market
Michael
Salzman
Vice president, loan
production, Essex
Financial Group,
Denver