Boosting Retail ROI Via the Break-Up Strategy

Originally Published: Commercial Property Executive

This isn’t always the easiest process, but when well-executed, it can provide higher returns than selling an entire retail center to one buyer, according to SRS Real Estate Partners’ Rich Walter

When it comes to the retail property sector, I don’t think anyone can argue that the most in-demand asset type continues to be single-tenant net lease .  While large, core centers certainly have the attention of larger private buyers and institutions, the buyer pool for STNL is robust, as the smaller price point and minimal-to-no landlord responsibilities appeal to a broader audience of family offices, private investors, and 1031 exchange buyers, to name a few. Additionally, they are often cash deals―always a plus for sellers.

These are just a few key reasons we have long been advocates and advisors to sellers on the break-up strategy for larger centers where it lines up with their goals. This is a process where we break up the center into smaller pieces to attract the substantial STNL buyer pool looking to capitalize on all the benefits a larger center has to offer such as branding, visibility, tenant quality, crossover traffic. This isn’t always the easiest process, but when well-executed, the strategy can provide a significantly larger ROI than selling an entire retail center to one buyer.  We have experienced up to a 30 percent improvement to pricing with this strategy.

Break-Ups and Downs

A typical property that works best for a break up has an anchor with adjoining shops on one parcel and then pads on the exterior of the property.  In the classic case, the anchor and shops are sold as the core property and the pads are sold individually.  In some cases, the anchor and shops can be sold separately as well, depending on the valuation matrix and parcelization.

There can be a need for parcelization and/or lot-line adjustments in the scenario if the property is on one large parcel.  From my experience, the majority of the time, the local municipality will allow for this process, which can take six months or so. Therefore, a seller must consider timing in the exit strategy analysis to protect against cap rate slippage or higher mortgage rates. 

Additionally, because the shopping center will now be owned by multiple parties, a Real Estate Association or other controlling agreements must be established so that the future of the site can be properly managed and controlled and any exclusive uses can be protected.

Existing lenders are a consideration as well. If the property has an existing non-securitized lender, they will oftentimes restructure the existing loan providing for Release Clauses where proceeds continue to pay down the debt as the individual parcels are sold. CMBS loans are harder to deal with as they rarely allow the collateral to be broken out. Depending on the economics, owners may opt to pay off the securitized loan and replace it with bridge financing to accomplish the break-up plan.

As I mentioned above, although a break-up strategy is no stranger to complexities and challenges, the significant increase in monetary benefits can make it worthwhile to many sellers. Ultimately, it is key to have an experienced advisor that is knowledgeable and has a depth of expertise in this type of transaction.

Rich Walter is executive vice president, Investment Properties Group, at SRS Real Estate Partners