Shopping Center Business is the leading monthly business magazine for the retail real estate industry.
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FINANCE 166 • SHOPPING CENTER BUSINESS • May 2017 sorship which have been actively leasing or repositioning. • Partnership buyouts in which the equi- ty partner is tired of the property and the general partner wants a debt partner who can handle risk. • Locations which have shown some signs of life as re-development opportuni- ties given the intrinsic value of the region, such as urban infill locations. A BRIDGE LENDER'S CHECKLIST As bridge lenders that focus on com- plex, transitional opportunities, Calmwa- ter sees developers investing in various types of distressed retail properties on a daily basis. As a developer, it is of first importance to recognize the pressing is- sues a lender will focus on, and be ready to show preparation for every potential situation. Today's lenders are specifically looking at: 1. Cost basis: Even the best centers and most stable rent rolls can become a problem for undercapitalized or over-lev- eraged ownership. For non-recourse lenders, as most private money tends to be, the most important metric is loan-to- value. A borrower is far more likely to get financing if they can bring in new equi- ty and reduce a lender's cost basis. The opportunistic buyer looks for distressed owners and lenders where new equity is not available, as they may have a chance at buying the property or note well beneath the previous ownership's basis. This low- er basis should allow a well-capitalized new owner to offer cheaper rents and higher tenant improvement packages to bring the property back from distress. If all else fails, a comfortable basis allows lenders to exit the investment, knowing they are probably not the right group to carry on the borrower's more opportunis- tic business plan. 2. Rent roll: Bridge lenders are con- cerned with a number of questions sur- rounding rent roll. For one, they look at current tenants' leases, including the percentage of leases expiring during the proposed new loan term, existing tenants' likelihood of lease renewal and whether the center's rents are at market rate. There are also questions surrounding tenant ac- tivity, from their occupancy cost/health ratios to whether the tenant's business can easily be replaced by e-commerce. 3. Location: Location is crucial for lenders to consider as well, both in terms of where certain tenants are located with- in the center and the outlook for the cen- ter's location within the market. In some cases, a center has competitive advantage because it has the best location, in oth- ers, a center can simply offer the cheap- est rent. It's important to understand a center's positioning in light of other op- tions in the market to which tenants can relocate. 4. Sponsorship: Lenders also strongly consider sponsorship, most importantly in understanding what the new owner plans to do differently than the previ- ously failing ownership. It's important to recognize whether sponsors are trying to create something that has never existed on a "what could be" valuation or if they are simply fixing problems and bringing once-performing real estate back online. If the sponsor does not have a realistic plan to re-tenant obsolete space, a loan is difficult to secure. However, experience in the market and a track record of stabi- lizing similar "distressed" situations does bode well for potential borrowers. One recent deal checked all of the above boxes. An opportunistic sponsor was purchasing a vacant, corporate-owned Albertsons grocery store in Southern Cali- fornia with a business plan of dividing the 100,000-square-foot center from one big box floor plan into three to four separate tenants via a large capital expenditure pro- gram. The borrower had great tenant rela- tionships and early-stage letters of intent from a number of strong credit tenants, but would not have leases signed at the time of close. Furthermore, the sponsor had a strong resume of successfully sta- bilizing retail centers. The borrower was ultimately able to negotiate a lower pur- chase price, given the quick closing date, but it needed non-recourse financing on its vacant retail center and required abso- lute certainty of ability to close in approx- imately 30 days. With all of the necessary elements in play, Calmwater was able to provide a favorable loan structure to the borrower. The retail environment continues to change and, with it, so does the lending climate for retail properties. For owners and developers, the key is staying on top of the trends that affect specific product types within retail, and preparing for any and all downside scenarios. SCB Bradley Ross and Connor Humphreys are vice presidents at Calmwater Capital, a Los Angeles-based provider of commercial real estate debt. ONLINE PROFESSIONAL DEVELOPMENT COURSE · 16 WEEKS FLEXIBLE WITH YOUR WORK SCHEDULE · GROUP DISCOUNTS A Leader in Retail Education & Training Next start date is June 5th . Contact us for details TJLExecEd@email.arizona.edu or 520.621.1539 · Become a more valued partner to your retail clients · Learn the keys retailers use to maximize revenue through consumer engagement and operational efficiencies · Understand how retailers gauge their performance... and yours! Stay ahead of your competitors. Become fluent in the latest trends and insights for the changing retail industry. Do you speak retail? TERRY J. LUNDGREN C E N T E R F O R R E T A I L I N G T h e U n i v e r s i t y o f A r i z o n a i s a n E E O/A A - M / W/ D/ V E m p l o y e r