Financing Focus

Retail Therapy

Stop and think before you buy that shopping center.

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 favorable financing?

Retail Considerations

As the 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 as these.

Here 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.

So 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.

2. 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.

My 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.

One 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.

3. 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.

4. Early in the process, send along any information that could help get a deal done. 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.

This 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.

In 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.

Also, 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 success.

5. 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.

If 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 working.

In 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.

Lisa Loften, CPA, is chief financial officer of Atlanta-based Halpern Enterprises. Contact her at lloften@halpern-online.com.

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