Loaning on Non-Conforming Small Strip Retail Centers

By Dan Harkey

As a small strip/convenience neighborhood retail center owner with all mom-and-pop tenants, you can obtain a loan using your property as collateral. This is a promising opportunity for your business.

Classification of types of shopping centers:

https://www.icsc.com/uploads/research/general/US_CENTER_CLASSIFICATION.pdf

Borrower mortgage broker comments to the broker/lender:

“My client has a 12-unit retail neighborhood shopping center with all mom-and-pop tenants on term leases but has now converted to a month-to-month tenancy.? The center is a bit underparked for peak traffic.? Also, one of the tenants is a sports bar with licenses to serve food and liquor.? The bar is a popular local hangout.? My client could not get a bank loan because institutional lenders considered the property legally non-conforming under current zoning regulations.? Can you help my client get a loan?”

The experienced and prudent mortgage broker/lender responds:

“Small neighborhood shopping centers historically begin with localized small entrepreneurs who may start with a lease, but often the lease expires and turns into a month-to-month tenancy.

Is there a substantial vacancy as a percentage of the total units??? Is it a consistent tenancy pattern with a reliable rental income cash flow?? Is car parking, which may include on-site and off-site spaces, adequate for rush hour? ?? Are there professional service providers if the lender were to take the property back in foreclosure?? Also, is the location a stable commercial area, meaning there are few risks of tenants solicited away to newer, better-located commercial sites?

Small centers can often be upgraded and repositioned by a few physical changes, including re-slurry sealing and striping the parking lot, repainting, reconfiguring the ingress/egress structure, and improving the monument signage.? Ingress refers to the right to enter the property, while egress refers to the correct exit.

Upgrades and reconfiguration can be complex when considering adjacent properties’ rights and agreements between the other business owners.? The borrower can get estimates for these improvements and include the cost in the loan. The lender may hold back the cost of the upgrades and place the proceeds in a licensed construction fund control agent's trust account. The fund control agent will disburse the proceeds as the work is completed, inspection is completed, and a conditional lien release is obtained from the subcontractor.”

Small strip centers can be successful ventures when underwritten correctly. As a lender, your thorough review of the bank statements of the ownership entity and the owner individually can give you a sense of security in this process.

If the property's title is held in a limited liability company or a corporate entity, the lender may require the borrower to sign a personal guarantee. A personal guarantee is a legal promise to repay a loan if the business can't. In the event of default and completed foreclosure, the lender may sue for any deficiency under the personal guarantee. A deficiency is the difference between the amount owed on a loan and the amount the lender can recover after foreclosure or repossession.

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Thank You

Dan Harkey

Educator & Private Money Finance Consultant

949 533 8315 [email protected]

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