Appraisal Matters

It isn’t during recessions that regional malls shows signs of problems.  There are lots of reasons why a regional mall could show signs of decline even during hot real estate markets, low interest rates and peak retail demand.  Let’s explore.

Examining the Financial Reports

As standard due diligence, appraisers either request copies of all leases with addenda or we ask to view them in manager’s office.  Given the cost and time of photocopying, usually we’re granted the latter.

I’ve always been amazed that lenders and others who have an interest in a regional mall don’t seem to do the due diligence to dig underneath the surface to find out what is really going on.  Here is a list of questions I would want to know the answers to that can easily be gotten by examining the leases, discussing changes with the mall manager and a simple walk-through.  They are early signs that a mall is in decline and is, or will, experience profit difficulties.

• How many new inline bay tenants have signed leases?
• Have any major and minor anchors gone dark?
• Is there a history of lease offers made from the mall to prospective major and minor anchors?  What were the counter offers?
• When can the next anchor(s) leave?
• Is there a clause in the anchor lease(s) that allow them to break the lease?  This is not uncommon when the mall owner is required to deliver a new anchor of a certain type such as a Kohl’s, Target or Boscov’s, by a certain date, otherwise they can declare their lease in default.  This reason alone is why anchor leases need to be read from beginning to end… especially the addendums, letters of communication, etc.
• What is the history of lease rate changes in the mall?  When an anchor leases, frequently inline bay tenants in that wing demand lease rate renegotiation.  Vacancy tends to increase.  When a mall has several years of decline prior to this, some tenants may be able to negotiate leases that are at or slightly above just the common area maintenance charges.  That’s not good.
• How many leases will be expiring in the next 12 to 24 months?  What percentage of inline bay space does that account for?  Is there a pattern (as in most of the expiration dates occurring in one part of the mall)?
• What are the credit ratings of the tenants who are expiring?
• How many national tenants have not renewed their leases and left?  This is especially crucial because these businesses are highly visible to other mall tenants.  Typically, the first level of vacancies occur in the anchors, followed by the second level of national tenants.  Strangely, it becomes easy to determine where a mall is on the “decline scale” by examining vacancies like these.
• What credit-rated tenant took over vacant national tenant space?  When temporary tenants start to show up, this is the third level of the “decline scale”.  I’ve explore temporary tenants in a separate blog.

A Simple Service

So, who is in the best position to answer these questions?  Not the loan officer.  Neither the mall owner nor manager can be expected to volunteer such information.  You guessed it - the third-party appraiser.  Since the appraiser would be examining the lease data anyway, how much extra would he/she ask to provide such as service to the lender?  Not much above the price of a typical appraisal.  Better yet, if the lender has an in-house appraisal staff, these questions can be with nothing more than staff time.

‘Seems to me that the answer to these questions is worth more than the cost of getting them.   Hopefully, my two cents worth is worth much more than two cents.

John Simpson, MAI