How do lenders treat outparcels in retail development?

Lenders typically approach outparcels in retail development with flexibility, but their treatment depends on how you plan to utilize those outparcels (ground lease, build-to-suit, or spec development). Here's what you need to know based on the most helpful WSO content:

1. Loan Sizing and Outparcels:

   • If the outparcels are not included in the initial development plan or are intended to be ground leased, lenders may exclude them from the loan sizing. This is because ground leases typically generate a predictable income stream but do not require significant upfront capital for construction.
   • If you decide to develop the outparcels as build-to-suit or spec, lenders will likely include them in the loan sizing, but this will depend on the pre-leasing status and the projected cash flow from these parcels.

2. Spec Development Considerations:

   • For spec development, lenders may require higher equity contributions or additional guarantees since there is no pre-leased tenant to secure cash flow. This increases the perceived risk for the lender.
   • The lender might also assess the market demand for the outparcels and the overall strength of the retail project to determine whether to include them in the loan.

3. Ground Lease or Build-to-Suit:

   • Ground leases are generally seen as lower risk since they involve leasing the land to a tenant who will handle the construction. This can make it easier to exclude the outparcels from the loan sizing.
   • Build-to-suit projects, on the other hand, may be more favorable to lenders if you have a strong tenant already signed to a long-term lease.

4. Structuring the Loan:

   • You may have the option to structure the loan in phases, where the main multi-tenant building is financed separately from the outparcels. This allows you to secure financing for the core project while deferring decisions on the outparcels until their use is finalized.
   • Alternatively, if the outparcels are included in the loan, lenders will likely require detailed plans and financial projections for their development.

In summary, the treatment of outparcels in retail development loans depends on their intended use and the associated risk profile. Ground leases are often excluded from loan sizing, while build-to-suit or spec development may require additional equity or guarantees. Structuring the loan in phases can provide flexibility as you finalize plans for the outparcels.

Sources: Calling all people in Development, Lunch & Learn -Ins and Outs of Construction, Lunch & Learn -Ins and Outs of Construction, Learning curve in development, How do I know I have what it takes to start my own development shop?