Small Strip Retail Centers: Loaning When Non-Conforming By Dan Harkey
Dan Harkey
Educator and Private Money Real Estate Lending Consultant | 30,000 + connections
As a small strip/convenience neighborhood retail center owner with all mom-and-pop tenants, you can secure a loan using your property as collateral. This can be a game-changing opportunity for your business, providing the financial boost you need to grow and thrive.
Classification of types of shopping centers:
Borrower mortgage broker comments to the broker/lender:
Non-conforming properties are those that do not meet the current zoning regulations. This can be due to changes in the zoning laws or the property's use needing to align with the current rules. My client's 12-unit retail neighborhood shopping center with all mom-and-pop tenants is considered non-conforming.? The center is a bit under-parked for peak traffic, and 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.? Potholes, breakage, and collapse are common in older strip centers because water seeps into the pavement and sub-base from freezing and rain, creating cracks that wear from the traffic's weight. ?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 price 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. This process ensures that the funds are used for the intended purpose and that the work is completed to the required standard before the total amount is released.
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Small strip centers can be incredibly successful ventures when underwritten correctly. As a lender, I would like to ask you to please review the bank statements of the ownership entity and the owner individually. It provides a robust security measure in this process and instills optimism for the venture's potential success.
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. If the business defaults on the loan and the lender completes foreclosure, the borrower, in this case, the property owner, may be personally responsible for repaying the remaining loan balance. 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]
Visit ??www.danharkey.com
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