Commercial banks provide purchase and refinancing loans for a variety of retail property types, each with shared financial characteristics yet distinct considerations based on the property’s use, location, and tenant structure. Many retail property loans are made to owner-users, also known as owner-occupied properties, where the borrower owns the retail property and operates a business within the space rather than leasing it to third-party tenants. Owner-user loans often require higher down payments—typically 20% to 30% or more—as banks assess both the borrower’s business performance and the property’s value when underwriting the loan.
Retail Property Classifications
Retail properties are classified based on their size, location, tenant mix, and intended use. Understanding these classifications is crucial for determining financing structures, investment risks, and tenant demand. Retail properties encompass a diverse range of property types, each sharing fundamental characteristics like storefront visibility and customer accessibility while also having unique features based on their tenant structure, size, and location. Below are common retail property types:
1. Regional and Super-Regional Malls
• Large shopping centers featuring national department stores, high-end retailers, and entertainment options.
• Typically located in high-traffic urban or suburban areas with strong consumer demand.
• Require significant capital investment and professional property management.
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2. Community and Neighborhood Shopping Centers
• Mid-sized retail centers featuring grocery stores, drugstores, and local businesses.
• Serve nearby residential areas, making them less vulnerable to economic downturns.
• Tenants typically sign longer-term leases, providing stability for investors.
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3. Strip Centers
• Smaller multi-tenant retail properties with businesses such as fast food, coffee shops, and convenience stores, typically without a major anchor tenant.
• Commonly located along major roads or suburban areas with drive-by traffic.
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4. Power Centers
• Large-scale shopping centers featuring big-box retailers like Target, Home Depot, or Best Buy, often surrounded by smaller retail stores and dining options.
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5. Lifestyle Centers
• Open-air shopping centers designed with pedestrian-friendly walkways, featuring a mix of high-end retailers, entertainment, and dining.
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6. Outlet Centers
• Large outdoor shopping complexes featuring brand-name discount stores, often located near highways or tourist areas.
7. Single-Tenant Retail Buildings
• Standalone properties occupied by a single business, such as fast-food chains, gas stations, or banks, often with long-term leases.
8. Mixed-Use Retail Properties
• Retail properties integrated with residential, office, or hospitality space, typically found in urban environments or transit-oriented developments.
Commercial Bank Retail Real Estate Purchase Financing
When evaluating a retail purchase loan, commercial banks conduct a detailed analysis of both the borrower and the property to assess risk. Borrowers seeking financing should be prepared to demonstrate financial stability, real estate experience, and a clear investment strategy. Below are some of the key factors that banks consider when underwriting a multifamily loan:
• Borrower Experience – The borrower’s history in owning and managing real estate, especially retail properties, is a major factor. Banks prefer experienced investors but may finance new investors with strong financials and a solid business plan.
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• Property Management Plan – Whether the borrower will self-manage the property or hire a professional property management company can impact the bank’s lending decision. Lenders favor well-managed properties with experienced operators.
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• Capital Improvement Plans – If the borrower intends to invest in property upgrades, the bank will evaluate whether the borrower has the financial resources to complete the improvements during the loan term.
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• Condition of the Property – Lenders require property inspections and condition reports to assess potential deferred maintenance or structural issues that could impact property value and cash flow.
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• Debt Service Coverage Ratio (DSCR) – The property’s net operating income (NOI) relative to its debt obligations must meet the bank’s required DSCR, typically 1.20x to 1.30x for stabilized properties.
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• Occupancy Rate – Lenders prefer properties with high and stable occupancy rates (typically above 85%) to ensure consistent rental income.
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• Rental Income & Market Conditions – Banks evaluate current rental rates compared to market trends to determine if the property can sustain long-term profitability.
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• Borrower’s Liquidity & Reserves – Lenders typically require borrowers to maintain cash reserves for unforeseen expenses, often equal to several months of mortgage payments.
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• Loan-to-Value (LTV) Ratio – Banks generally finance 70-80% of the property’s value, requiring borrowers to invest 20-30% equity in the deal.
By thoroughly reviewing these factors, commercial banks assess whether a retail property represents a low-risk, sustainable investment before approving a loan.
Commercial Bank Retail Real Estate Refinancing
When refinancing a retail property, commercial banks apply many of the same underwriting criteria as they do for purchase loans, such as assessing the property’s financial performance, the borrower’s experience, and overall market conditions. However, refinancing introduces additional considerations, as banks evaluate how the borrower has managed the property since acquisition and whether the property has improved or declined in financial and operational performance.
Below are some of the key factors banks consider when underwriting a retail refinance loan:
• Capital Improvements Since Purchase – Has the borrower made any significant upgrades or renovations to enhance the property’s value and revenue potential?
• Net Operating Income (NOI) Performance – Has the property’s NOI improved or deteriorated since the borrower’s original purchase? Banks favor properties that demonstrate strong and stable income growth.
• Asset Management Effectiveness – Has the borrower successfully managed the property by reducing loss to lease, improving tenant retention, and optimizing cash flow?
• Occupancy Trends – Has the property maintained above-market or below-market occupancy since purchase? Consistent occupancy levels signal stability to lenders.
• Major Capital Improvement Needs – Is the property due for significant repairs or upgrades to maintain its marketability, and does the borrower have sufficient cash reserves to fund these improvements post-refinancing?
• Rate & Term vs. Cash-Out Refinancing – Does the borrower simply want to reduce the interest rate and extend the loan term, or is the goal to pull equity out for reinvestment in other projects?
• Prepayment Penalties & Loan Costs – If the borrower is refinancing an existing loan, are there any prepayment penalties or fees that could impact the financial feasibility of the refinance?
• Property Value & Loan-to-Value (LTV) Ratio – Has the property appreciated or depreciated since purchase, and does the new loan amount align with the bank’s LTV requirements (typically 70-75%)?
• Debt Service Coverage Ratio (DSCR) Stability – Does the property still meet the bank’s minimum DSCR threshold, typically 1.20x to 1.30x, based on current rental income and expenses?
• Market Rental Growth & Demand – How have local rental rates and market demand changed since the original purchase? Banks evaluate whether the property’s revenue potential aligns with market trends.
Refinancing a retail property provides opportunities to lower financing costs, unlock equity, and improve cash flow, but banks require a comprehensive evaluation to ensure the loan remains a sound investment. Investors should be prepared to demonstrate strong property performance and financial stability to secure the best refinancing terms.
Retail Commercial Purchase Loan Types & Qualification Criteria
Retail property financing requires different loan structures depending on whether the borrower is an owner-user or investor, as well as the property’s tenant mix, lease terms, and location. Below are common loan types available for retail commercial purchases, along with qualification criteria for each:
Conventional Bank Loans
Overview: Offered by traditional banks with fixed or variable interest rates, requiring strong borrower financials, higher down payments (20-30%), and full documentation.
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Qualification Criteria:
• Borrower must have strong credit (typically 680+ FICO score).
• Minimum 20-30% down payment required.
• Debt Service Coverage Ratio (DSCR) of 1.25x or higher.
• The property should have a stable occupancy rate (typically above 85%).
• Requires full documentation, including tax returns, financial statements, and rent rolls.
SBA 504 & SBA 7(a) Loans
Overview: Designed for owner-user retail properties, providing low down payment options (as low as 10%) and long repayment terms with government-backed guarantees.
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Qualification Criteria:
• Business must occupy at least 51% of the property.
• Business financials must show sufficient profitability and operating history.
• Credit score of 650 or higher is preferred.
• Borrower must have at least 10% down payment.
• Personal and business tax returns required for underwriting.
CMBS (Commercial Mortgage-Backed Securities) Loans
Overview: Non-recourse loans securitized into bond markets, ideal for income-producing retail properties with stable long-term tenants.
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Qualification Criteria:
• Property should have creditworthy, long-term tenants with strong lease agreements.
• Loan-to-Value (LTV) ratio typically 65-75%.
• DSCR requirement of 1.25x or higher.
• Borrower must provide detailed financial reports for underwriting.
• No personal guarantee required, but stricter property performance requirements apply.
Life Insurance Company Loans
Overview: Long-term fixed-rate loans with low interest rates, suitable for high-quality, stabilized retail assets occupied by creditworthy tenants.
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Qualification Criteria:
• Prime retail locations with national or strong regional tenants preferred.
• Typically requires low LTV (50-65%), meaning borrowers need significant equity.
• DSCR of 1.50x or higher due to conservative underwriting.
• Minimum loan amounts are typically $5 million or more.
• Borrower financial strength and experience in commercial real estate required.
Bridge Loans
Overview: Short-term financing used to acquire or reposition retail properties, often used before securing permanent financing.
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Qualification Criteria:
• Suitable for properties undergoing renovations or stabilization.
• Loan terms typically range from 6 months to 3 years.
• LTV generally up to 70%, with higher interest rates.
• Borrower must demonstrate a clear exit strategy, such as refinancing or sale.
• Fast approval process but requires a higher interest rate (8-12%).
Owner-Occupied Commercial Real Estate Loans
Overview: Tailored for borrowers operating their business within the property, with underwriting based on both the business’s financials and the real estate itself.
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Qualification Criteria:
• Business must occupy at least 51% of the retail space.
• Borrower should have a strong business credit profile and operating history.
• DSCR of 1.20x or higher required.
• Down payments typically range from 10-30%, depending on loan type.
• SBA 504 and 7(a) loans are common options for this type of financing.
Choosing the Right Retail Property Loan
Selecting the right loan depends on several factors, including whether the borrower is an owner-user or investor, the stability of the property’s income, and the borrower’s financial qualifications. At PCVI Commercial, we work with a range of commercial lenders to match our clients with the best financing solutions tailored to their investment or business needs.
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