Suppose you are life company - a life insurance company that makes large commercial real estate loans on trophy properties - and a deal crosses your desk on a power center in Phoenix.
A power center is a retail subtype generally around 450,000 SF and larger, where you will find category-dominant anchors, including discount department stores, wholesale clubs, and off-price stores. Among their most common type of anchors are home improvement, discount department, warehouse club and off-price retailers. Power centers serve a trade area of 5 to 10 miles.
Think of a power center as a huge shopping center consisting of big box stores. A big-box store, a hyperstore, a supercenter, a superstore, or a megastore is a physically large retail establishment, usually part of a chain of stores.
So let's go back to the loan request on your desk. It looks like a good deal, but one of the largest retailers, Urban Outfitters, has a short-term lease that is maturing in just two years. Will they renew? If not, suddenly the deal is a risky one.
You therefore look at the Health Ratio. The Health Ratio is the ratio of the Occupancy Cost (rent, etc.) divided by the Total Sales of the particular subject store.
Health Ratio = Occupancy Cost / Total Sales
For example, suppose the store is in San Francisco, where rents eight years ago used to be very high. The store might be paying $70,000 per month in rent and concessions, but it might only be selling $800,000 in goods per month.
Common sense tells you that the health ratio here looks awful. I don't know what that ratio should be, but it seems to me that your rent should only be a tiny fraction of your sales.
Now let's suppose that the store is selling $15 million in goods every month. Now that looks healthy and profitable. Urban Outfitters will surely renew its lease, so you make the loan.
My thanks to George Smith Partners who posted this tombstone several years ago:
"George Smith Partners successfully arranged $7,600,000 in permanent financing for a non-traditional anchored shopping center in Northern California. The Big Lots and Dollar Tree anchors had short terms remaining on their primary leases, (but) they both had exceptional health ratios (occupancy cost/total sales)."
