Multitenant Properties
Multitenant properties usually are occupied by two or more tenants
with shorter term leases, lasting two, three, or five years. Multitenant
properties are considered to be much more flexible than singletenant
buildings because they are designed to provide a variety of
store spaces and sizes in proximity to large anchor tenants. Large
anchor tenants like Krogers serve as a major draw for other smaller
tenants. Tenants have specific space and visibility requirements, and
if the building doesn’t have what the tenant is looking for, the tenant
will go elsewhere.
The advantage that a multitenant building has over a single-tenant
building is that there is less risk associated with the disruption of
cash flow in the event of an unexpected vacancy. Having two or three
tenant vacancies in a multitenant building is not all that unusual.
The same does not hold true for single-tenant properties. Whenever
a single-tenant property loses a tenant, the property becomes 100
percent vacant, resulting in zero cash flow.
Another advantage of a multitenant property is that its economic
life span is much longer than that of single-tenant property.
Multitenant buildings are adaptable to ever-changing retail trends,
unlike single-tenant buildings, which are designed specifically to
meet a tenant’s need at that time. Circuit City and Mervyns are examples
of single-tenant buildings designed for a specific retail use that
were closed and are now sitting empty.
Both single-tenant and multitenant properties have their inherent
risks, but lenders usually deal with those potential risks in their
underwriting and make adjustments to compensate themselves for
the risks. For example, lenders usually limit the amortization period
of a single-tenant property to a maximum of twenty years if the tenant’s
primary lease term is only five or ten years. The reason for a
shorter amortization is that the lender wants the loan paid down as
quickly as possible because there’s no guarantee that the tenant will
be in business ten or fifteen years down the road. Finding a replacement
tenant for a single-tenant or special-use building takes a long
time and therefore presents a greater risk to the lender. However, this
is not the case for multitenant buildings. Loans for multitenant
buildings often have amortization periods up to thirty years because
of their versatility and longer economic life.
There are many types of multitenant properties, but they are usually
differentiated among their own classification. Commercial properties
are generally divided into six classifications, with further subclassifications.
This is the standard used by commercial real estate
lenders when quoting and pricing a loan. With regard to classification,
single-tenant buildings are actually treated as a subclassification
within each of the six general classifications. The six general classifications
of commercial properties, along with their subclassifications,
are as follows:
1. Retail
? Grocery-anchored shopping center
? Strip center (unanchored)
? Community center
? Neighborhood center
? Big-box power center
? Regional mall
? Single-tenant
2. Office
? High-rise (downtown)
? Midrise (suburban)
? Medical office building
? Single-tenant
3. Multifamily (apartment)
? High-rise
? Midrise
? Garden-style
An Introduction to Commercial Real Estate Loans 13
? Condominium
? Mobile home park
4. Industrial-warehouse
? Office warehouse
? Office-flex
? Self-storage/mini-warehouse
? Light manufacturing
? Distribution facility
5. Hospitality (hotel and motel)
? Full-service
? Limited-service
? Extended-stay
? Resort
6. Special purpose
? Senior/independent living
? Assisted living
? Skilled nursing facility
? R&D (research and development)
Types of Commercial
Real Estate Lenders
Commercial real estate loans are originated by thousands of different
types of lenders, either through correspondent relationships or
directly to the borrower. “Loan origination” is an industry term that
refers to the underwriting and funding of a loan. When a lender says
that its company originated $2 billion in loans, it is the same as say-
14 Commercial Mortgages 101
ing that the lender underwrote and funded $2 billion in loans.
Commercial real estate lenders primarily originate new loans using
two distinct methods. The first and most common way is through
correspondent relationships. The second method is by dealing directly
with the borrower.
Correspondent relationships can be exclusive or nonexclusive. A
correspondent relationship is nothing more than an exclusive right
given by the commercial real estate lender to an independent, thirdparty
company, such as a mortgage banker or mortgage broker, for
the purpose of marketing and originating new loan business for the
lender. The best example of a correspondent relationship (and historically
the only way that commercial real estate loans were originated
for many years) involves life insurance companies. Beginning
in the 1950s, these companies saw an opportunity to reinvest hundreds
of millions of dollars in cash generated from their insurance
premiums into commercial real estate loans. However, they needed
help in finding high-quality commercial real estate developers and
borrowers that were actively building and investing in the same quality
of commercial properties. From that need emerged the commercial
mortgage banker. The job of a commercial mortgage banker was
to search for qualified developers and borrowers who were looking
for financing on behalf of the life insurance company. These commercial
mortgage bankers and brokers acted as the liaison between
the life insurance companies and the borrowers in sort of a matchmaking
role. Using the life insurance company’s money, a commercial
mortgage banker merely table funded the loan in exchange for a
fee for originating and underwriting the loan. Those relationships
were usually exclusive, meaning that the only way a borrower could
contact the life insurance company was through the mortgage
banker who had the exclusive right to represent that company.
Correspondent relationships still exist, but they are now few and far
between.
An Introduction to Commercial Real Estate Loans 15
Today, with the advent of the computer and the Internet, commercial
real estate lenders are less dependent on correspondent
agencies to source and find new loans. Commercial real estate
lenders today are multifaceted finance companies with a network of
regional and branch offices from which to market their loan products.
Even some of the large life insurance companies that once were
closed off to the general public are now dealing directly with anyone
that needs a commercial real estate loan. Exclusive correspondent
relationships are now on the decline, and, unlike in decades past,
both borrowers and mortgage brokers have unrestricted access to a
vast array of commercial real estate lenders.
Generally speaking, commercial real estate lenders are separated
into seven classifications: banks, life insurance companies, conduit
lenders, agency lenders, credit/finance companies, mortgage
bankers, and private lenders.