What would be the proper way to view the risk level of a ground up development when you have an LOI signed for a tenant that would lease the entire space with a 10+ year initial lease term?
Evaluating a deal for a land parcel we own and don't have much background in retail but it's a favorable land parcel for a specific execution type. Would this give a higher level of comfort to construction lenders, and make it potentially easier to bring in LP equity partners?
a-basic-name, have you checked out these or run a search:
More suggestions...
Hope that helps.
If you have signed leases with a tenant to be 100% preleased, the only real risk factor would be actually getting the building constructed. There is the slight risk that the tenant hits bankruptcy, but the main risk at this point would be permitting and timing lining up with the timeline you have for delivery in the lease. Lenders should be pretty comfortable with lending on this project assuming you are well on track for permits and being able to go vertical. And LP partners are the same way, the cash flows are pretty set so assuming the set cash flow is giving good returns, investors shouldn't have any real issues.
Agree with this for most part - would just add that development / construction risk (either in regard to time of delivery or cost) has been highest its ever been over last 6 months, although some recent GC budgets I've seen have been tempered a bit from say, late June through August. Figure I can assume necessary permits and zoning have been attained since you have a signed LOI - the process of permitting / zoning can be a painstaking process in some municipalities. I would also say that the experience of your GC in constructing retail is of importance to the lender / LP since your firm has little experience with the asset type.
IMO, I would keep a conservative (high) contingency cost and make sure delivery is on time or ahead of projections to best of your ability. Seems like you have room to push assumptions elsewhere given the favorable location.
Thank you both for such helpful perspectives. You are correct that the area has all the permits, approvals and proper zoning requirements. It's basically an acquisition straight into a development.
Is it common for companies to break an LOI? That's my biggest fear is having someone back out. There are three proposals from various companies all doing the same, but each of their terms are different. I don't want to get into the deal assuming the most favorable, and then have them back out only to be stuck dead with worse terms.
Have you done a ground up single tenant deal? SNDAs can be an absolute pain in my own experience and I was wondering if it also rears its head in single retail tenant ground up deal involving a construction lender
We have done ground up single tenant deals on the outparcels or our retail centers, and they are a pain but nothing unreasonable.
Your best bet will be to float it by construction lenders and LP peeps. My guess is more often than not a construction lender is going to want to see a signed lease, not a signed LOI, in order to lend. Possibly you could strike an agreement without an executed lease but it's going to be structured with contingencies, just as the lease you're signing will be structured with contingencies to allow the tenant to back out if certain milestones aren't achieved. Just want to be mindful & thoughtful as to ensure that the contingencies being agreed to don't cause the project to jam up.
Since you already own the land, don't see any issues with just general sourcing of both lenders & LPs by describing hte scenario and seeing what their interest would be with an executed LOI.
Thanks for your input. I appreciate the help!
IMO LOIs help comfort levels but especially in today's economic environment they don't mean that much. I feel like you need take a harder look at how much they've committed into the actual process (getting all their financial ducks in a row, permitting/design, general financial performance) than the signed document for an LOI. Just to throw a number at it, I'd say an LOI is like a 50% commit.
If someone's engaged design efforts and actually sunk money into the process and has a fat balance sheet that's looking to expand, I'm much more comfortable that they'll move forward than if they've just signed a non-binding term sheet.
To give an analogy, an LOI feels like dating someone. If you have aligned interest and have a strong relationship, you could feel more comfortable planning your future together and might even move into the same apartment. Getting a contract feels more like getting married with all the strings attached.
Thanks for the insight. It's an interesting situation. The seller essentially is making their money by having gotten the parcel through entitlements, and a county/gov approved and permitted SDP. Their broker has gone to the effort of sourcing three LOIs for the space - it's for a daycare, and three major players are involved with their corporate entities, not just new franchisees.
Literally the role of my group would just to be the dev and capital to get the project built and managed. Knowing this, does that change your perspective on the level of commitment by the tenants? Many thanks.
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