Summary:
Strip centers are locally commercially zoned properties with small entrepreneurial tenant users, generally mom-and-pop. Small strip/convenience neighborhood retail centers present a unique opportunity for excellent cash flow, making them an attractive investment option. Owners can obtain loans using their property as collateral. In the case of non-conforming properties, where institutional lenders may shy away, private money lenders play a crucial and reassuring role. These lenders, often individuals or small groups, are willing to take on the risk associated with non-conforming properties, providing an alternative source of financing and instilling confidence in the investment.
Article:
Securing a loan for non-conforming properties involves the upfront costs of an appraisal and a phase 1 environmental site assessment. The borrower is responsible for commissioning and paying for these reports, which determine the property's value and identify potential risks. On the other hand, the lender relies on these reports to ensure a thorough and reliable assessment process, which is a crucial part of the loan approval process.
The borrowers may be upset about the front-end expense, but they should consider the gas station across the street and the dry cleaners next door that have been operating for 40 years.
If the appraisal comes back as expected and phase one comes back as transparent, we can proceed with processing and closing the loan.
The borrower must understand that a phase II assessment and solid boring will be necessary if the phase 1 assessment does not meet industry and lender requirements. This thorough assessment, which includes solid boring to test the soil's stability, ensures the borrower is fully informed and prepared for the process. It also serves as a risk management tool for the lender, instilling a sense of reassurance and confidence in the investment.
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:
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 not aligning with the current rules. In such cases, a mortgage broker can be crucial in helping the borrower navigate the loan process. A mortgage broker, like myself, has the expertise and network to find alternative financing options for non-conforming properties. For instance, my client's 12-unit retail neighborhood shopping center with all mom-and-pop tenants is considered non-conforming. The center is underparked 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, which can pose challenges in securing a loan.
The experienced and prudent mortgage broker/lender responds:
Historically, Small neighborhood shopping centers begin with localized small entrepreneurs who may start with a lease, but the lease often 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, potholes, 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 property 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, the 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 the work is completed to the required standard before the total amount is released.
When underwritten correctly, small strip centers can be incredibly successful ventures. As a lender, please review the bank statements of the ownership entity and the owner individually. This provides a robust security measure and instills optimism for the venture's potential success. Remember, we are here to support and guide you through 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. 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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