Financing Retail’s Transformation – Q&A With Meridian’s Brian Flax, James Famularo

Many real estate professionals have been paying close attention to retail’s transformation over the past several years. Fewer have taken notice of a parallel transformation in retail financing. With ICSC New York on the horizon, we thought it would be a good time to catch up on these developments and more with Brian Flax, Executive Vice President of Sales, and James Famularo, President of New York retail leasing at Meridian. Here’s what they had to say:

Commercial Observer Insights: ICSC’s New York event focuses on deal-making. What are some of the trends in retail financing that attendees should be aware of?

Brian Flax: The most important thing is that retail financing has become a true niche area, analogous to financing construction, hospitality, or healthcare. Retail financing used to be straight forward where you would show the cash flow and arrange a loan based on simple metrics. That approach doesn’t work in today’s market because of all the nuances within retail leases and the unique nature of each tenant and retail submarket. When working on retail assignments today, we work hard to quantify and qualify the asset and the credit worthiness and sustainability of each tenant. Often times the loan execution hinges on specific details in leases related to free rent periods, tenant improvement allowances, termination rights, co-tenancy, and most importantly who specifically is the credit behind the lease. Retail financing specialists understand these intricacies and know how to present the deal, including each tenant, in the best possible light.

James Famularo: I agree completely. From a financing perspective this used to be a much more simple business. Now, when we are evaluating offers on a space with the landlord, we have a lot more considerations in terms of how this affects the value, viability and type of financing for the building.

Given the challenges that brick-and-mortar stores have faced in recent years, is it more difficult to find lenders for retail properties these days?

Flax: I should say, first of all, that the retail market is in a more stable place than many may realize. And although some specific corridors and product categories are struggling, many others are succeeding and expanding.

Famularo: In urban settings, we’re seeing high demand for health food and fitness concepts. Meridian’s leasing team used to do two fitness deals a year, this year we expect to close 20 and this tenant type is very attractive to landlords. These deals are not for just typical gyms, but also new wellness concepts such as acupuncture, cryotherapy, and meditation. These new businesses are well-capitalized, growing, and actively seeking storefront space.

Flax: In the suburban markets, many malls that once housed big-box retailers have been repositioned to include smaller boxes and tenant types that are more focused on the customer experience as opposed to conventional shopping. Many grocery-anchored shopping centers nationwide are reporting very strong sales and are thus highly attractive investments for equity and debt capital. Quality retail assets with rents at market levels and a good credit profile are actually very desirable for lenders as part of their overall diversification strategy. For example, when a CMBS lender sees a successful retail property with a good credit profile they will compete aggressively for the deal and often provide similar or better leverage and spreads than certain multifamily assets.

Famularo: To date, year-over-year in 2019, Meridian’s retail leasing team has grown its business from 52 to 110 deals; a growth of 90%, that’s our reality. Many of these leases are composed of restaurants, gyms, schools, cafes, bars and other service-oriented tenants. We have been adept at positioning ourselves to service the busiest segment of the market, which is the $100 to $300 per square foot space.

What kinds of deals are the retail teams at Meridian working on?

Flax: We just closed a loan for a portfolio of seven grocery-anchored shopping centers in suburban markets for $97 million. What’s striking about this deal is that we were able to arrange 75 percent loan-to-value financing with a lot of interest-only, along with a sub-4 percent interest rate for 10 years on a non-recourse basis. We were able to secure such attractive terms because the store sales were very high and trending favorably combined with the unique track record and resume of the sponsor. The demand we had from potential debt providers for this transaction was overwhelming.

Famularo: A good example of the types of deals we work on and the investment we make to get them across the finish line is 771 Ninth Avenue in Hell’s Kitchen. This was a very complicated deal which went far beyond the scope of services offered by most retail leasing brokers. The tenant we signed, Particle Ink, an immersive digital experience, leased the entire 13,500 square foot building, but in order to open we had to get involved in every aspect of the lease and proposed build out. This involved taking an active role with the architect, the Department of Buildings, and the New York State Liquor Authority, among numerous others advisors. We’ve done over 30 deals in the immediate five-block radius and this experience helped us know who to engage with and how to keep momentum going. We also currently have three listings in the area which are exciting and will only help to reinforce the allure of the neighborhood.

What’s ahead for Meridian’s retail teams?

Flax: We’re going to continue to specialize and focus on providing a high level of service to this segment of the market. We constantly refine our rolodex of reliable and aggressive retail lenders. It’s clear to us that the successful brokers are the ones who are well-informed about the retail nuances and understand the strengths and potential challenges with each deal.  In addition to being deal-focused, we try to provide value to our clients in other ways which often includes providing guidance for the optimal way to craft and structure a lease with a new tenant. Clients call frequently for advice when considering different tenants and lease structures, so they can understand the financing impact of those options and make more informed decisions. With this in mind, we see a lot of opportunity for us to continue to add value in this segment on a national scale.

Famularo: We’d like to continue to grow at the pace we’ve been growing since joining Meridian last year. We expect the fitness and wellness segment to expand even further and have been actively meeting with new and unique food and beverage concepts about taking space and staking their claim in New York City. It’s a very exciting time for our team and 2020 should be another strong year of growth opportunities.

Is there anything else you’d like to add?

Famularo: Yes. Everyone should feel welcome to visit Meridian at booth 2813 at ICSC New York. We’ll be featuring an augmented reality experience as well as serving iced and hot La Colombe coffee all day along with snacks. Further, team members from all three of Meridian’s businesses, retail leasing, investment sales and debt capital markets, will be on hand to discuss the market and explore deal making opportunities.

Contact Brian Flax at 212-612-0207 or bflax@meridiancapital.com and James Famularo at 646-658-7373 or jfamularo@meridiancapital.com.