Underwriting Shopping Centers
What You Will Need to Start
1. Copies of All Leases
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Leases are the core of a shopping center investment. They specify the terms and conditions of the income and expense stream.
2. Copies of Correspondence and Billing Records for Common Area Maintenance
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In addition to their monthly rent payments, many shopping center tenants reimburse the landlord for some, or all, of the expenses associated with operating the center. These reimbursements may vary from tenant to tenant.
3. Copies of Profit and Loss (P&l) Statements and Related Bills
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Complete records of the income and operating expenses for the previous two years (at the least, the previous calendar year) and year-to-date, including property tax bills, insurance invoices, landlord-paid utility bills, landscaping, parking lot, security, maintenance, and other general expense invoices. Having copies of the bills will allow you to better understand and articulate the center’s operating expenses.
4. Copy of Itemized Capital Improvements
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Complete records for the same period as the profit and loss statements. Examples of capital improvements are new roof, parking lot resurfacing and striping, and new HVAC units.
5. Copies of Tenant Sales Figures
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Many leases have percentage rent clauses that base the rent in part on the tenant’s actual sales. In these cases, the landlords require that the tenants report their sales figures.
These sales figures also give you an opportunity to spot tenants which may not be viable businesses. Generally speaking, retailers want to have their total rent at 8% to 12% of gross sales. High-volume and high- profit retailers will pay at the upper range. A tenant with rents at 16% of gross sales might signal that the bay may be vacant soon. Owner-operated businesses may tough it out at 14% to 16% because it’s the owner’s sole source of income.
6. Copies of Third Party Vendor Contracts
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These are agreements between property owners and private contractors for regular services such as landscaping, HVAC maintenance, parking lot sweeping, snow removal, security and parking attendants. Look for the following when reviewing service contracts:
Frequency of service
Length of service
Expiration date
Cancellation clause (Does the contract survive the sale of the property?)
Warranties on work
Cost, relative to market standards
Billing period
7. Copies of Financing Documents (Note and Mortgage/Trust Deed, Payment Coupon)
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You should be knowledgeable about of the underlying financing:
How many loans are on the property?
What’s the outstanding balance?
What’s the interest rate?
When is it due?
Is there a lock-out clause that prevents prepayment?
Is there a prepayment penalty? If so, how much?
Is the loan assumable? (With bank loans, probably; with “conduit” loans, probably not.)
Is the loan recourse or non-recourse?
Can secondary financing be placed on the property? (With bank loans, maybe; with “conduit” loans, usually not.)
8. Copies of Cross Easements
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A shopping center can have a number of easements that allow access to the nearby properties or that allow neighbors to have access to the shopping center property. Cross easements, for example, provide access to neighboring or adjoining property, so it is important to understand the legal survey of each property.
Easements can increase or decrease the value of the property. They may also be either expiring or subject to a charge. Occasionally, reciprocal easements require an owner to pay for repairs or maintenance on adjoining properties. Reciprocal parking agreements are another type of onerous arrangement. Any buyer will want to know how any reciprocal easements effect the property.
9. Copy of Reciprocal Operating Agreement (ROA)
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When a shopping center has tenants which own their own pad and building (and sometimes part of the parking lot), Operating Agreements act as the shopping center’s rules of operation between those tenants and ownership to assure that no single owner adversely effects the other. They describe the tenants’ hours of operation, types of tenants who can occupy the building, the merchandise that can be sold, parking, division of common area maintenance costs and other important operational issues.
10. Copy of Side Agreements
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Side agreements between the tenant and landlord are not part of the formal lease but are legally binding. These may or may not be kept in the tenant file. Before a sale closes, attorneys often request a written statement about the existence and nature of side agreements.
11. Copy of the Partnership Agreement
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The entire agreement isn’t necessary, just the page(s) that confirm that the person signing documents for the partnership (e.g., the Representation Agreement) is authorized by the partners to do so.
Note 
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