Commercial Loans Blog

Commercial Loans on Land, Out-Parcels, and Pads

Posted by George Blackburne on Mon, Jul 14, 2014

describe the imageFinding a lender for a commercial loan secured only by land is pretty hard these days.  Many commercial lenders are still sitting on huge portfolios of land upon which they foreclosed during the Great Recession.

There is one kind of land, however, that is infinity financeable.

Actually there are two types of land upon which it is fairly easy to obtain a commercial loan.  The second type is farmland.  Farmland is a hot commodity right now.  Farmland in Indiana, for example, has tripled over the past seven years.  My own commercial loan company, Blackburne & Sons, loves to finance corn farmland.

But the subject of today's lesson is commercial out-parcels or pad sites (same thing).  An out-parcel is a small lot at the outer edge of a shopping center, usually reserved for later sale to a fast-food outlet or a chain restaurant; also called a pad site.

Usually there is a large shopping center on some busy commercial strip (thoroughfare).  Further back from the strip is the grocery store or the Wal-Mart, and well as some inline retail units.  Right on the actual strip, however, are several building pads that are ideal for a fast-food or a chain restaurant.  Please look carefully at the picture above.  The Advanced Auto Parts site and Burger King site are perfect examples of out-parcels.

Lenders love to make commercial loans on out-parcels or pad sites.  While the typical loan-to-value ratio for most land loans is in the range of 25% to 40%, many commercial lenders will happily make purchase money commercial loans of 55% to 65% loan-to-value on out-parcels.

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We're now down to the final 38 weeks of the World Cup.  This morning when France played Nigeria, it was the first time an American referee ever officiated a knockout round match. The French won it by a touchdown.  -- Jimmy Kimmel

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The thing to be careful about when underwriting a commercial loan on a shopping center is NOT to apply the same outrageous price paid per square foot by a fast food chain for an out-parcel to the value of the land underneath the entire shopping center!  No-no-no.  The success of a fast food restaurant is very dependent on street visibility and easy street access.  A fast food franchise owner might pay five times the price per square foot for the convenient out-parcel on the left compared to the difficult-to-reach out-parcel on the right.

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Trap

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I used another fancy term above - inline retail.  Inline retail is another word for a store.  The term inline came about as malls were developed in the 60's because the stores were literally all in a line in the mall.

Inline tenants are smaller tenants than anchor tenants.  Inline tenants pay higher rental rates and sign shorter leases.  These stores benefit from the foot traffic that anchor tenants bring to a retail center, and inline tenants account for the majority of the scheduled rents at most retail centers.

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There was a huge blowout at the World Cup yesterday when Germany beat Brazil 7-1 in the semifinals.  It got so bad that the refs told Brazil, “You know what? Go ahead and use your hands.” -- Jimmy Fallon

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Topics: Out-Parcels