Fairly new to real estate and recently came across an interview question, and was hoping to get some feedback from experienced professionals in the CRE biz. The questions is “when underwriting a property you find out that the anchor tenant’s sales fell a significant amount the previous year. How do you handle this?” I have a basic understanding, but would love a solid response to this question from someone more knowledgeable. Thanks all.
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It is fairly common now for a lot of brick and mortar stores to really just act as a showroom and to accept returns. Depending on how they do their accounting, returns are deducted from sales which could be a reason for the decline.
You can also review the lease to see if there is a relocation clause to potential move the anchor into a smaller space.
I'm a year into CMBS, but several things come into play.. when does the lease mature, and does the tenant have a termination option? One thing you can calculate is the occupancy cost, which is the total gross rent divided by the total sales. Depending on what tenant it is and what the occupancy cost is, you may mark the rent down in your underwriting to bring the occupancy cost down to something more reasonable.
Loan structure wise, some things I've seen include upfront and/or ongoing escrows for leasing costs to retenant the space or trigger events at a certain thresholds where if triggered, any excess cash flow will go directly into a lockbox to fund leasing costs associated with future leasing.
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