Retail Mall Underwriting
I received an ad hoc request to underwrite a regional mall. I’m currently working through a proforma of the malls performance in ~2023-2024 (or when things get back to ‘normal’).
I have a 2022 budget, historical financials and rent rolls, however, I only have a 2021 rent roll that breaks out reimbursements for tenants.
As far as proforma expenses, I was going with 2022 budget (+ 2/3%) with management fee being a % of EGI.
I’m looking for some advice when it comes to income, base rent + overage rent + % rent.
Base rent steps are included in the rent roll received, so that is straight forward, however, I don’t have agreements for reimbursements by tenant.
As of 2021 year end, there were a couple holdover tenants, I’ve assumed $0 income from them.
As for % rent and reimbursements, how would you handle those items, for all current tenants whose leases are not expiring? I have 2021 sales info, I could assume tenants sales went up 5% and determine if overage rent would be paid… For reimbursements would you use 2021 figures as that is the only data that is available?
thanks
Are you able to request more info?
Here are my notes -
1. Calculate recovery rates for 2022 budget and historical financials. Unless there's a large migration from one lease type to another, or it's fixed reimbursements for most tenants, they should generally be within a reasonable range. It might make sense to peg that in 2023-2024 if you're really only doing a first pass.
2. Percentage rent - ask if any pay percent in lieu (i.e. in lieu of base rents and possibly other charges). Be more discriminating because those will obviously be heavier payers than tenants who exceed breakpoints.
3. Percentage rent - 5% over true % rent payers may be ok. Can you get an update on 2022 vs 2021 ytd? At the end of the day, sales are hard to extrapolate, especially considering how volatile the economy is today. If you can get a more current T12 sales hten use that to individually forecast % rent that's a solid, conservative estimate.
Holdover rent should be base rent + 50% of base rent.
For recoverable income, that is going to be hard to calculate. If you have the income statement from the previous owner, you can see what they were paying in CAM and back in from there. However, you won't be able to see if yoy increases for each tenant is cumulative, non cumulative, etc.
If you don't have the leases, this will almost be impossible as there are cam exclusions and yoy restrictions for % increase of charges. Property taxes are usually public information. and insurance is normally no greater than $1 psf.
For % sales, they are usually not hitting threshold unless they are grocery anchored or there's an alternative rental agreement in which the breakpoints are much more attainable.
if you're really desperate and shooting in the dark, I would use about 35% of base rental agreements as recoverable expense calculations
Thanks guys, got it done. Ended up not as ugly as I thought but worked out.
On a side note, does anyone have a rent roll projection/rental income projection template for 50+ tenants. I will create one but I'm sure there's one laying around where I can input ~3+ generations of leases with annual bumps based on unit size and downtime between units.
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