Cash Is King, As Dealmakers Say The Biggest Obstacle To Making A Deal Is The Lack Of Financing

This column of Strolling the Agora appears in the July 6 issue of Shopping Center Digest


Whether you want to build a shopping center or expand it, grow your retail empire by entering a new market or open another store or two, cash is king. Without it, forget it. Nothing new here. We’ve been hearing this refrain from many dealmakers around the country: “It’s the economy, stupid.”



It’s the main reason, for months now, dealmakers have been complaining about the lack of movement and deals are being frozen, even those that “were made” just recently at the Las Vegas RECon. And few of them are optimistic about the freeze lifting in the near future—though we are now in summer and there are many economists and mavens in and out of the administration who are pointing to positive signs.



“Even if there are some convincing signs,” said one investor, “these have not filtered down yet to commercial real estate such as shopping centers and retailing. First there has to be enough positive movement in other areas to be considered a trend, and that will have to take place primarily in a reduction in unemployment, and an uptick in residential values.”



The biggest obstacle to moving forward?



To Kenneth Roosth of Roosth Construction: “I am finding that Financing is the biggest hurdle right now.”



To Ira Meislik of Meislik & Meislik: “…the most common barrier is the inability to obtain financing. Principals are calculating ROIs based upon leverage, and it seems that the numbers don’t work without leverage.”



To Mary Farwell of Noteworthy Investments and Managemednt: “Financing, financing, financing. Working on now that is less than 50% LTV with perfect credit and clean environmental but they still have taken excessive time and, just today, hit my client with an extra point. Now is definitely the time to be creative in our financial side and specialize in exchanges, owner-finance, lease purchase, etc.”

In addition to financing problems, Alan Smith of Bourn Partners cites issues of co-tenancy, terminations, and the demand to "make it worth my while." And, "impact fees are raising the barrier as ...we are faced with $4.00 and to $5.00 of fees to obtain approvals from the municipalities."

One financial maven stressed that lenders are reluctant to lend without a strong cash flow and excellent sponsorship. “They are trying to make agreements more creative and more palatable, but they are becoming difficult for borrowers to accept. Some are putting points up front, or perhaps even trying to reduce the amount of the financing it is willing to provide.”


One national chain which has cut back on the number of new stores it plans to open this year attributes the decision to developers who have halted or delayed building plans. “We haven’t seen such a lack of new projects in 20 years,” he said.


“It’s hitting the smaller operators especially hard,” said another dealmaker, “especially those who have been using credit cards and have depended on long-standing credit lines to keep their business afloat. Some banks have arbitrarily cut back on these credit lines, especially over the last six or seven months.”



It’s much worse than in the early ‘90s when traditional financing “froze up completely,” said a senior dealmaker. “Then, to get the ball rolling, many turned to Wall Street and IPOs as owner-developers re-invented the REIT (real estate investment trust) industry, which had never established a foothold in the shopping center/retail chain industry, except for several owners of strip centers.



Some in the industry say REITs are expected to lead the rebound in commercial real estate, mainly because they have the ability raise money by selling securities; the IPOs are the example they cited when shopping centers became an important part of this niche. Such companies as Simon Property Group, Macerich and Kimco Real Estate have already re-financed much of their debt.



“Now,” he continued, “these landlords—and tenants—are directing their attention offshore where there are less hassles, easier deals, a more welcome environment, and the opportunity for joint ventures and partnerships.”



[We had discussed this in earlier columns, and the fact that some foreign investors—in development and in retailing--were beginning to fill the vacuum here by expanding into North America.]



Perhaps another deterrent to making a deal today can be the local laws, codes, zoning and the like, especially in those markets where retailing is considered to be saturated, and over-stored.



Said Jeffrey Evans of Intertech Design Services: “It seems as though tighter restrictions have been made on what is and what is not allowed in regards to signage and trade dress. Certainly I understand that there needs to be restrictions, but how far do companies need to go in diminishing their brand[?]”



It can be simplistic to base most of the gridlock on just one aspect, lack of funding. However, this is the main cause that many dealmakers point to.

More information on Shopping Center Digest and our associate publications, Expanding Retailers and Directory of Major Malls may be obtained from our website, www.shoppingcenters.com