We’re developing a retail project with one main multi-tenant building (spec/ partially leased) and 3 outparcels. Have not finalized whether outparcels will be ground leased, build-to-suit, or spec.
Regarding a bank loan, what’s the typical way to structure this? Do you exclude the outparcels from loan sizing? What if you decide to build them tspec for example?
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:
Loan Sizing and Outparcels:
Spec Development Considerations:
Ground Lease or Build-to-Suit:
Structuring the Loan:
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.
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What type of financing are you trying to get?
If conventional income loan, I don't think many lenders will assign value to the outparcel if undeveloped. Lenders underwrite based on as is NOI today for income loans. There is also the question of parking requirements for any of your current tenants and whether they have a right to the parking stalls.
If construction loan, different story - more likely to get a construction loan if you've gone through the municipal zoning process already and submitted plans for that site that are approved. Even better if you already have a lease agreement for the future development of that parcel with a good tenant who is interested in it.
This is for a development that we have entitled and plans for. I understand that the main retail center will be the collateral, but just confused how the outparcels are treated given the variety of options and implications to financing.
Should still be included as collateral. I imagine you'll be completing work for those pads, right? If there's cost associated with those pads, then lender should be advancing proceeds towards that and the pad land acquisition. Loan is going to be sized by LTC and will include release provisions (ie, 120% of allocated loan amount).
Kind of up to you and your business plan. Assuming today there is no deal or plan for those outparcels, but you want to take out proceeds for them?
Two structurings come to my mind:
Hopefully this is helpful / close to what you're considering or maybe sparks other thoughts if not.
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