Retail Property Loan Guide

Most common retail property types are anchored retail, unanchored retail and freestanding store. Most common anchors include supermarket-drug stores, discount department stores, dry goods, retail and home improvement stores. To get most favorable terms the anchor should be financially healthy national, regional or local chains with at least five years remaining on their leases, as of the date of closing. Anchors should exhibit strong sales histories.

Unanchored centers should have a complimentary tenant mix. Stores in unanchored centers must have strong, stable sales histories. Not more than 25% of the leases should expire in any single year. Centers with base lease terms exceeding five years beyond the final term of the loan typically will receive most favorable financing. Stores in unanchored centers must have strong, stable sales histories. Not more than 25% of the leases should expire in any single year.

Freestanding stores are considered on a case-by-case basis. Current minimum economic occupancy of 85 to 90% is desirable. Stores with greater than five years remaining on the lease term are preferred.

Unanchored and freestanding retail should be located in high traffic areas. Where direct competition exists, the property is required to exhibit a stronger market appeal than the competition or a history of retaining its tenancy, sales volume and competitiveness.

Debt Service Coverage measures a mortgaged property's ability to cover monthly payments defined as the ratio of net operating income over the mortgage payments. DSCR (debt service coverage ratio), of less than 1.0 means that there is insufficient cash flow generated by the property to cover required debt payments. Generally, 1.20 to 1.30x DSCR is required to get best terms on a loan, depending on the quality of the location of the market, the property and the existence and quality of anchor tenants.

The ratio between the principal amount of the mortgage balance to the current value of the underlying real estate collateral is referred to as LTV. Typically up to 80% maximum LTV in first position for permanent financing is available of preferred terms. Higher leveraged requirements are possible but require much higher interest rates. Interest rates are based upon the quality of the real estate and the credit strength of the deal.

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