Real Estate Development Development Question on Retail
I am a commercial real estate broker wanting to become a developer eventually.
I am working on a few deals in the after build value of 150 million mixed-use retail.
The developer tells me we are waiting on a retail anchor K----- to committ and he has a meeting with them for the proposal.
He said once that happens we can close on the options contracts we have signed on the land and I can get paid my commission.
It seems the hardest part is getting the anchor to commit so the equity partner will put up the money to buy the land.
All the numbers work pro-forma wise it's just the anchor we are waiting on. How long do deals like this typically go on for?
The developer said with the credit crunch and the U.S. market that the potential anchors are just scrutinizing the deals more and going slower before proceeding.
I really like your site and info.
I don't have much money so these 2 projects closing will change my life and open up future investment opportunities.
Comment by Colm
There's a golden rule in life, "he who has the gold, rules."
So you developer client is 'spot on' with his comments about the anchor tenant.
The value of the K----- name is massive and K-----know that. Once K----- sign the deal, financiers will lend money, other tenants will also sign leases and the whole deal proceeds ... and of course the land will settle and you get paid your commission.
When a major tenant signs a lease it is a guarantee that a major part of the rental income is guaranteed, so that secures the whole development deal. Financiers see that as great security and feel safe in lending their money.
You see there is only 'one use' for commercial premises like a shopping center and that is to show a good return on the investment in the land and buildings ... to be clear on that point, you can't live in a shopping center, so it only has one use. If it has no tenants the center only has 'potential value.'
The occupants of a shopping center, the tenants, only sign leases so they can invest in stock and fittings and get a return on their investment by selling goods. Having said that you can see that in the hierarchy of tenants, the major tenant is the king; then you have what are called mini-major tenents.
These are the national chains of speciality shops you see in every center that sell women's cloths, shoes, chemist shops, hardware stores etc. They have big national brand names but the amount of floor space the occupy is small.
Below that level is the normal speciality stores, sometimes referred to as 'mom & dad' stores who occupy the smallest amount of floor space.
To complete this answer I must talk about the rent paid on a $/square foot or square meter.
The rental paid is in inverse proportion to what I have described above. Mum & Dad speciality stores pay the highest rate per square foot and the major like K----- pays the least.
The reason is that there is a higher risk of mum & dad stores going broke than there is with K----- going broke ... it is the difference in the professional nature of one and the lack of it in the other.
Of course the amount of space K------'s use is big so the rental amount is also big but the rate per square foot is the lowest. Then there is the question of other running costs of the center being apportioned among the tenants and once again Mr. Big pays the lowest.
It is just a case of size and market muscle and as in other business areas 'size does count.'
Hope this helps you understand better.
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