How a neighborhood retail center gets underwritten.

An apartment building has 24 tenants on 12 month leases. If two leave, two more arrive, and the income barely moves. A neighborhood retail center has six tenants on five year leases. If the anchor leaves, a third of the income leaves with it and may take a year and a tenant improvement allowance to replace.

That is why retail underwriting starts with the leases, not the rent roll. The rent roll tells them what is being paid. The leases tell them for how long, by whom, and on what terms.

Who the tenant is. A national or regional chain with a corporate guaranty is one thing. A franchisee with a personal guaranty is another. A local business in its second year is a third. Lenders sort tenants into credit and non-credit, and a center that is mostly credit tenants gets better terms than one that is mostly local, even at the same NOI.

How long is left. Lenders look at the weighted average lease term across the center and at what rolls in the next three years. A center where 60% of the income expires before the loan matures is a center where the lender is underwriting a re-leasing, not a rent roll. Expect a lower loan or a rollover reserve.

Who pays the expenses. Triple net leases, where the tenant reimburses taxes, insurance, and common area maintenance, put the expense risk on the tenant. Gross leases put it on you. Most small centers are somewhere between, and the lender reads the reimbursement language to see what actually gets recovered. Unrecovered expenses come out of NOI.

Options and co-tenancy. Renewal options at fixed rents cap the upside. Early termination rights, exclusives, and co-tenancy clauses (the tenant can leave if the anchor does) are read closely because they are how income disappears without a default.

Even on a triple net center, underwriting builds its own expense line. Typical assumptions on small retail:

• Vacancy and credit loss of 5% minimum, higher if the market or the rent roll warrants it
• Management of 3% to 5% of effective gross income
• Replacement reserves of $0.15 to $0.25 per square foot per year
• A tenant improvement and leasing commission reserve on space that rolls during the term, often $1 to $3 per square foot per year on the rolling space

Those come off the top before coverage is tested. On a 20,000 square foot center with $280,000 of NOI on the owner's statement, the underwriting NOI can come in $25,000 to $35,000 lower.

Retail sizes tighter than apartments. Bank-style programs usually stop at 65% to 70% loan-to-value. On a refinance our programs go to 75%, and mixed use with apartments upstairs gets the higher number as a rule. Minimum coverage runs 1.25x at most banks and 1.30x to 1.35x on single-tenant net lease. Amortization is typically 20 to 25 years at banks, up to 30 on some programs. Terms are 5 year fixed, occasionally 7 or 10 for stronger credit tenants.

That combination is why a retail center and an apartment building with the same NOI do not support the same loan. On a $300,000 NOI at 7% on a 25 year amortization, 1.20x apartment coverage supports roughly $2.94 million. Retail at 1.30x supports roughly $2.72 million, and the LTV cap may bring it lower still.

This is the part that catches owners off guard. Some programs, particularly the national bank-style ones, exclude specific tenant types: gyms and fitness centers, car washes, casual dining restaurants, hotels, and general office among them. Others are cautious about cannabis, vape, and certain personal services. An otherwise clean center with a gym as the anchor can be a decline at one program and a routine approval at another. We route by tenant mix on the first call.

None of that reflects on the building. It is policy. But it means the tenant mix should be part of the first conversation, not the fortieth day.

• The rent roll with square footage, lease start and end dates, base rent, reimbursements, and options for every tenant.
• Every lease, with amendments. We abstract them; you can speed it up with your own abstract, but underwriting reads the originals.
• A trailing twelve month operating statement with reimbursements shown as income and expenses shown gross.
• The tax bill and insurance declarations.
• A site plan showing which suite is which.
• Tenant sales, if the leases require reporting and you have them. Sales relative to occupancy cost tell underwriting how sticky a tenant is.
• The environmental history. A Phase I is standard on commercial; a prior report or a clean history saves weeks. A former dry cleaner or gas station on the site changes the loan.
• Your own financials. A personal financial statement and two years of returns, because commercial loans at banks are recourse and global cash flow applies.