The Anchor, the Roof, and the Refi Window
You manage a 120,000 SF mixed-use office/retail asset for a private owner. In-place NOI is $1.85M, and comparable sales indicate a 6.25% cap rate. The $12M mortgage is interest-only at 5.1% and matures in 18 months; lenders are quoting 6.75% with 25-year amortization and a 1.35x minimum DSCR. A roof and HVAC project estimated at $1.4M has been deferred two years, and the reserve holds only $310K. The anchor tenant leases 38,400 SF (32% of GLA) at $22/SF NNN and expires in 14 months. Market rent is $28/SF NNN, but re-leasing would take about nine months, with $35/SF TI and a 5% leasing commission. Renewal would cost roughly $5/SF TI and a 2.5% commission on a five-year term. The owner asks whether to sell now, refinance and hold, or fund the capital work first.
1. Value the asset under three outcomes: as-is, anchor renews at market, and anchor vacates and the space is re-leased at market on a five-year term. What does the spread tell you about the negotiation?
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As-is: $1.85M / 6.25% = $29.6M.
Renewal at $28: rent rises by ($28 - $22) x 38,400 = $230,400, so NOI = $2.080M and value = $33.3M. Costs are $5 x 38,400 = $192,000 TI plus 2.5% x (5 x $28 x 38,400) = $134,400 commission, about $326K, so effective value is roughly $33.0M.
Vacate and re-lease at market: stabilized NOI is also $2.080M, so the stabilized value is $33.3M, but you must absorb:
- Nine months of downtime: 0.75 x $28 x 38,400 = $806,400, plus unrecovered opex during the vacancy
- TI: $35 x 38,400 = $1,344,000
- Commission: 5% x (5 x $28 x 38,400) = $268,800
Total drag is about $2.42M, so effective value is roughly $30.9M.
The ~$2.1M spread between renewal and rollover is the anchor's leverage, and it is also your ceiling on renewal concessions. Spending anything under about $2M to secure an early renewal is value-creating. It also kills any 'wait for the market to improve' strategy, because today's as-is value already assumes occupancy.
2. Can the owner refinance without an equity check? Show the DSCR sizing and state the maximum loan, then note the timing trap.
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Maximum annual debt service the property can support = $1.85M / 1.35 = $1.370M.
Loan constant at 6.75%, 25-year amortization: monthly rate 0.005625, n = 300, monthly payment factor = 0.005625 / (1 - 1.005625^-300) = 0.00691, so the annual constant is about 8.29%.
Maximum loan = $1.370M / 0.0829 = $16.5M. Against the $12M existing loan, that is about $4.5M of excess proceeds, more than enough for the $1.4M capital project and the ~$2.4M rollover cost.
Timing trap: lenders size on in-place NOI at closing. If you refinance before the anchor signs, you size on $1.85M; if you close after the anchor leaves, you size on a much lower number. Close on the strength of an executed renewal, not a pro forma. Also test the LTV constraint (say 65% of $33M = $21.5M), which is not binding but should be confirmed with the lender.
3. Sequence the next 18 months and identify the single biggest threat to the plan.
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Sequence:
- Months 1-2: open the anchor renewal conversation now, before the 14-month mark, and put a proposal on the table at $27-$28 with modest TI. Bring the roof leak history into the conversation as a solved problem, not an open risk.
- Months 1-3: spend $150K-$200K on targeted roof repairs and the two worst RTUs to stop active leaks and protect tenant relations. Defer the full $1.4M replacement until after closing so it does not distort the refinance pro forma.
- Months 4-9: refinance once the renewal is signed, at roughly $16.5M. Fund the reserve to a level that supports the remaining capital plan.
- Months 10-18: execute the full roof/HVAC scope, then hold and operate.
Biggest threat: the anchor either leaves or extracts concessions larger than the computed $2.1M spread because it knows your loan matures in 18 months and you have no reserve. The mitigation is to run the renewal negotiation in parallel with lender term sheets so you always have a credible alternative, and to keep the capital project's phasing flexible. Second threat: a lender retrade if the lease is signed on terms that cut NOI in year one.