TUSTIN, CA—Retail landlords must be prepared to answer any question a potential lender might ask about their property, their tenants and the market before seeking financing or refinancing, Chris Hite, president and co-founder of Coreland Cos., tells GlobeSt.com. We spoke with Hite about how owners should prepare for the financing or refinancing process, and the key elements that can facilitate a more seamless process.

GlobeSt.com: What are some of the challenges you see your clients facing when pursuing financing or refinancing of a property?

Hite: The primary concern remains the uncertainties about the tenants themselves—particularly larger tenants such as big-box retailers or grocers. While we see occupancy levels improving in some areas, there is still a lot of speculation about big-box tenants that may no longer need to be operating in such a large footprint when it comes time to renew. The borrower needs to solve for this during the underwriting process. As a result, we are seeing more situations where the lender holds back proceeds or requires the landlord put up a larger reserve to mitigate the risk of a non-renewal or closure.

GlobeSt.com: What are the key elements that owners must have in place to make the process less painful?

Hite: Frequently analyzing tenant sales, as well as operating expenses, is critical. Lenders are scrutinizing current and proforma operating income in fine detail, particularly issues related to tenant health and downstream exposure to renewals. They are looking into a tenant's financial strength overall, historical budgets, operating performance and CAM reconciliations. The tighter the underwriting package presented to the lender—meaning, if it's clean, consistent and well accounted for—the smoother the process.

GlobeSt.com: What does the owner need to accomplish this?

Hite: The entire management team—asset managers, property managers and brokers—must be extremely proactive regarding the operations of a shopping center. The management team must maintain constant communication with tenants, and owners should be responsive to their managers and brokers. It's one thing to read reports, but it's another to respond proactively to the recommendations of your management and brokerage team in order to lead the market.

GlobeSt.com: How does all of this information impact the underwriting process?

Hite: If you are actively talking with tenants you will have an answer when lenders ask what to expect of your tenants in one, five or 10 years. You need to be keenly aware of the health of tenants who are paying high rent or occupy large square footages, always looking ahead at least six months.

This awareness also enables you to make better immediate decisions on the property. If a tenant is dramatically under market, you may not want to engage in early-renewal discussion. And if you do, fixed bumps and shorter terms may be in order. If they are over market, you might start to market that space now to minimize potential downtime between tenants.

GlobeSt.com: What are some of the other common demands?

Hite: Anticipate a lender's questions. For example, lenders will say, “Tell me the last five deals that were done in the immediate trade area,” and an informed brokerage team can provide that information. A good leasing team understands how market comps stack up and can help you craft the best story. Lenders are not living it every day and they don't know every corner, so this is really the owner's opportunity to share the whole story. Understanding incentives and TIs in the local market is essential in order to speak articulately about where the property is, and where it is going.

GlobeSt.com: What are the earmarks of a well-run, well-managed asset?

Hite: A well-run, well-managed asset has a distinct advantage in its ability to secure financing or refinancing. Lenders want to see an accurate balance sheet, income statement and historical information to analyze trends. This data gives the owner the ability to explain why a property might be trending upwards or downwards.

Concise yet detailed CAM-reconciliation models are vital in retail. Retail is unique in that the leases are designed for the tenant to pay a majority of operating expenses on the property. However, national tenants will attempt to negotiate substantive carve outs. The market will dictate which carve outs a landlord will have to agree to, and it's imperative to read leases closely, understand the CAM language and account for it accurately. This might also be an opportunity to create value as leases come up for renewal. For example, if a tenant does not pay an administrative fee or reimbursement of a typical expense, it might be time to start pushing on some of those areas if leverage now favors the owner. Every dollar goes into NOI, which translates into value.

GlobeSt.com: What should knowledgeable resources be able to provide owners looking to invest or refinance retail properties?

Hite: Ultimately you create real value in a property by increasing net operating income with a stable long term revenue stream, and efficient operating expenses. A landlord's team of resources (i.e. managers and brokers) can most quickly identify the areas of opportunity. The key is to listen and communicate, making sure the entire team is working towards the short- or long-term objectives of the property.