Stop and think before you buy that shopping center.
By Lisa Loften, CPA |
The climate for retail real estate deals is improving around
the country, as pricing stabilizes and it becomes somewhat easier to forecast
the performance of a retail center. With more sellers realizing that now might
be a good time to put a property on the market, companies going into
acquisition mode often need to address preliminary questions: Are we ready to
take on an acquisition? And if so, what do we need to do to ensure we can get
chief financial officer of a company that has made two shopping center
acquisitions in the past year — and is looking for more opportunities — I have
been working with my company’s senior management team to answer questions such
are five considerations to think about as you work toward the answers.
1. Think about worst-case scenarios as
you consider if you are ready to take on debt
. Certainly, the outlook for the economy, and in turn,
consumer confidence, is unclear, as the slow U.S. recovery and Europe’s
economic problems continue to have an impact around the world.
be pragmatic. What if occupancy falls at your existing properties? What if you
have to reduce lease rates? You want to be completely comfortable with your
company’s financial wherewithal going into a deal.
Cash is king, and it can help you get favorable financing.
Some companies are using cash to finance real estate deals, then securing
financing after the fact, which can provide more options in seeking favorable
terms. This can also make closing a deal much simpler, and may even be the
factor that helps you win a deal over other potential buyers who have financing
contingencies in their offers.
company took this approach with the past two acquisitions. In each case, after
closing the deal with cash, we were able to then secure the exact type of
financing that fit each specific deal.
of our acquisitions was a value-add deal that was not yet ready for permanent
financing, so we secured interim financing through one of our banking
relationships. Meanwhile, because the other property was fully stabilized, we
went straight to the permanent life company market for financing on that deal,
putting long-term fully amortizing debt in place in less than 45 days.
Be proactive in defining what you want from a lender
Lay out the terms you want when you
first make the ask for financing. And if you aren’t well versed in reading and
understanding loan documents, ask questions. Don’t simply rely on your
attorneys, who may not be looking at all the business points of the documents.
Early in the process, send along any information that could help get a deal
Over-communicate: send both potential
lenders and the other party in a deal everything you think could be useful to
them. In retail deals, for example, a common mistake is not initially giving
full details on the lease deals and the financial health of a center’s tenants.
information is critical for evaluating cash flows and the risks related to a
property. You can certainly provide such details later in the process, but a
deal will go more smoothly if you supply as much information as possible early.
addition, take the time to read the leases and understand the items that might
trip up lenders, so you are ready to answer their questions. For example,
lenders will often want to fully understand what the tenant is paying for in
addition to the base rent, since lease deals can vary in that regard. Free rent
periods should also be clearly laid out to lenders, so they know exactly what
they are underwriting.
maintain good, up-to-date information systems. Invest in quality
industry-specific accounting software that tracks all of the financial components
of the leases you administer, and that has a robust accounts payable and
financial reporting component. Being able to respond quickly to lenders’
requests for information, both to get a deal done and to ensure a smooth
partnership after a deal closes, will go a long way toward ensuring future
Follow your instincts as you evaluate opportunities.
Time wasted on a deal that doesn’t work is what economists call an “opportunity
cost,” meaning you could have spent your time — and your lender’s time — on a
more productive project.
you have a gut feeling early on that a deal might not work, act on it. Dig into
what is making you feel uneasy, and quickly decide if a deal is worth pursuing.
Chances are good that your instincts will be right, and your lender will
appreciate it if you are only presenting deals that have the best chance of
summary, there are many things you can control that will increase your chances
of successfully getting a deal financed. Planning, tied to tight reporting
systems and a realistic look at your company’s finances, will help ensure that
deals contribute to your company’s success instead of being a drag on it.
Loften, CPA, is chief financial officer of
Atlanta-based Halpern Enterprises. Contact her at firstname.lastname@example.org.