If you’re planning to apply for retail property loans to fund your next deal, you need to understand how lenders evaluate retail acquisitions to find the right structure and get approved on workable terms. In this guide, we’re looking at the main types of retail property investment loans and how to find the right loan structure to match your property’s income profile and your overall investment strategy.
What are retail property loans?
Retail property loans are a type of commercial real estate loan used particularly to acquire, refinance, or improve properties occupied by “retail” businesses — meaning businesses that sell goods or provide services directly to customers:
- Shopping centers
- Grocery-anchored retail centers
- Single-tenant stores
- Strip malls
- Restaurants
- Neighborhood retail buildings
- Mixed-use buildings with a significant retail component
Like in any other commercial real estate loan, the property serves as the collateral.
What financing options are available for retail property?
| Financing Option | Best Suited To | Typical Structure and Advantages | Main Limitations |
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| Conventional Bank or Credit Union Loans | Occupied retail properties with established income. |
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| CMBS Loans | Larger stabilized retail properties with predictable income. |
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| Private or Bridge Loans |
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| Life Insurance Company Loans | High-quality retail properties with strong occupancy. |
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| SBA 7(a) or 504 Loans | Eligible businesses buying retail property they will occupy. |
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How do lenders assess retail property, borrowers?
It depends on whether the property is tenant-occupied or owner-occupied:
- Retail-centric investment properties earn income from third-party tenants, so lenders who underwrite in this segment will primarily look at the property’s NOI and value, along with how stable the tenant mix is.
- Owner-occupied retail properties house the borrower’s business, so lenders mainly assess the financial health of both the business and the real estate.
In both cases, lenders will look at these fundamentals:
- Retail ownership experience – Do you have experience managing similar properties? That’s a strong point in your favor. If you’re a first-time buyer, it may be wise to hire an experienced manager or bring in an operating partner to show lenders that the property will be run by someone who knows the asset class.
- Credit history – Do you have defaults on previous loans or unpaid tax obligations, or similar credit problems? Lenders will look closely at how you handled them. Explain what happened and how you solved the issue.
- Liquidity – This pertains to the cash you have remaining after closing to cover tenant improvements and temporary income interruptions. If you use all your available cash for the down payment, lenders may see the deal as too thinly capitalized and therefore too risky to approve.
- Net worth – How much do all the guarantors’ assets add up to after deducting liabilities and guarantees on other loans? Some lenders expect the combined net worth of you and your partners (if you’re working with other investors) to equal or exceed the loan amount.
What retail property underwriting criteria do lenders use?
In terms of the property itself, lenders will look at its:
- Net operating income (rental income minus normal operating expenses) – Lenders will not automatically accept the NOI you present in your application — they will recalculate the property’s income using more conservative assumptions. They will likely exclude income that will not recur (such as an unusually large late-fee payment) and raise understated expenses. Their revised projection will also assume some vacancy.
- Debt service coverage ratio – Most lenders want to see a DSCR of no less than 1.25 in many cases. Read our complete guide to DSCR in commercial properties for more in-depth information.
- Loan-to-value ratio (compares the loan amount with the appraised property value) – Lenders will usually limit the loan to a percentage of the appraised value because they need an equity cushion. Read our guide to LTV in commercial real estate.
How are retail property loans structured?
Borrower liability
- Recourse: If the lender forecloses and the property sale does not repay the full loan, they may pursue your personal and business assets for the remaining balance.
- Nonrecourse: The lender generally cannot pursue you for the shortfall. That said, you can still become personally liable for actions covered by the loan’s carve-outs (such as fraud or an unauthorized transfer).
Interest rate
- Fixed rate: Your interest rate stays the same for a stated period.
- Variable rate: Your rate changes with a benchmark rate plus the lender’s spread, so if the benchmark rises, your payments may rise too.
Repayment schedule
- Fully amortizing: Each payment you make reduces the principal. By the maturity date, you have repaid the balance in full.
- Balloon: Your payments are based on a longer repayment period than the loan term, so you still owe a balance at maturity. You can repay that balloon payment with cash, or sell the property and use the proceeds to clear the balance. You can also refinance the loan and roll the remaining debt into a new loan.
- Interest-only period: For a set time, your payments cover only the interest charged. You do not pay down the amount borrowed until that period ends.
How are retail property loan interest rates determined?
Lenders price each loan according to (1) capital-market conditions and (2) how risky the transaction is. This is why stabilized grocery-anchored centers that don’t have near-term lease expirations may receive better pricing than partially vacant shopping centers that need extensive repairs to attract tenants.
Do note that the interest rate alone doesn’t determine the cost of borrowing. You also have to think about:
- origination charges
- exit fees
- interest-rate caps
- similar financing costs
Calculate the expected cost over your planned holding period rather than simply selecting the lowest stated rate.
Let’s discuss your retail property loan options
Private Capital Investors arranges commercial real estate financing for a wide range of assets, including shopping centers and single-tenant retail properties. Submit your retail property loan scenario to our team to discuss suitable financing structures.
