Prodigy Real Estate - SI NY Real Estate Blog

Edin Sabovic, which is a member of the Commercial Real Estate Team, as well as the Luxury Real Estate Team here at RealEstateSINY, discusses the important factors and guidelines when investing in Strip malls or Shopping centers on Staten Island. Edin is also a member of the National Association of Realtors, New York State Association of Realtors as well as a member of the Staten Island Board of Realtors.

There are essentially two types of shopping malls. One that everybody is familiar with: classic shopping mall, a covered large structure with hundreds of stores big and small. Then you have small strip malls comprised anywhere from three to four stores to a few dozens. This is the type of shopping centers being discussed in this blog

Within that strip mall nomination, there is different categories: neighborhood shopping centers, regional shopping centers, community shopping centers, outlet shopping center and more.

The first and foremost aspect when investing in strip malls is the concept of the Anchor store. Anchor stores are usually big brand names stores, like large grocery stores, pharmacies, or department stores; they are stores that everyone knows and would bring in large foot traffic, notoriety, and business to all other stores in the shopping center. However, consider the type of Anchor store that anchors the location. A grocery Anchor store is the ideal Anchor store, and here is why: A grocery store will generate regular foot traffic, often multiple times a week, giving more exposure to the shopping center.

Places like a Starbucks or a Dunkin Donuts will also often generate multiple weekly visits and are no doubt, excellent Anchors. However, grocery stores have an advantage here. The advantage of a grocery store is that it is a non-cyclical business. This means that it does not get affected as much by economic fluctuation. No matter what, we will always need groceries, while expensive lattes, not so much and we can easily do without it if need be.

Another advantage is that the store should not be impacted as much by today’s internet shopping as opposed, for example, if you had a Best Buy as an Anchor store.

If you are a veteran investor, you could indeed go ahead and buy a single commercial property suited for large tenants. However, for beginners or less experienced investors, multiple smaller stores are a better fit. The reason is that it will allow you to mitigate your risks. If one tenant leaves, you will have three or more tenants still in place that will be able to have you sustain your mortgage or continue bringing cash flow.

Another critical aspect to pay attention to is the leases in place. How long is left on the leases? What are the rent increases provisions? The reason why this is important is that for the lending banks, leases are more valuable than the property itself. What a commercial lender will look at is the financials or more precisely income projections.

Another thing to keep in mind is that the size or brand recognition of the tenant does not necessarily reflect a lower risk. A small CPA office, for example, can very well carry less risk for you than say a billion dollars company on the verge of bankruptcy. Remember Radio Shack?

Just like in residential rentals, it starts by a rental agreement. In this case, a commercial lease agreement, between the Landlord and the Tenant.

The lease agreement will detail the duration, how much, who pays for what, rent increases, what you’re allowed to do or not do, and many other clauses. Usually, commercial leases will run anywhere between 3 and 20 years, depending on various factors, type of business, your goals etc…

The expenses you will have in a shopping center as a Landlord include maintenance, insurance, and property taxes. The lease will define who pays for the expenses.

• A Gross Lease is when the Landlord will pay for all these expenses and will charge a rent to the Tenant above those expenses.
• A Modified Gross Lease is when the Tenant will pay to some of the expenses. The Landlord pays the others and then charge a rent to the Tenant above that. So, for example, the Tenant would pay for Insurance and property Taxes and the Landlord for maintenance.
• The investor’s favorite type of commercial lease is the Triple Net Lease also known as Triple N (NNN). In a Triple Net Lease, the Tenant pay all the expenses (maintenance, insurance, and property taxes) and the Landlord get rent on top of that.Some of the reasons why Triple Net Leases are an investor favorite is that they are usually held by strong tenants, there are no management responsibilities, a low turnover, they are long term leases and therefore deliver a stable cash flow. They are often favored by investors looking to prepare for retirement because it represents long-term stable income and protects against inflation and becomes a sort of long-term annuity.

A Lease agreement is critical and can make or break an investment! I strongly recommend enlisting the help of an Attorney or a Commercial lease specialist to negotiate a Commercial Lease agreement.

When you invest in a strip mall, you will, in fact, fluctuate depending on the type of tenant and the type of Lease agreement. Investors can expect anywhere from 3 to 8% percent capitalization in Staten island. A long term solid tenants, such as a Bank or Fast food chain, will bring around 3-5% while a strip mall of 4 tenants, for example, with Gross leases might bring a cap rate around 6% and as high as 8%.

Guidelines to keep in mind when investing in shopping centers on Staten Island: 

1. As we discussed earlier, strip mall investors should look for and identify a strong Anchor store, preferably a grocery store. 
2. The shopping center should have strong street appeal, which means to try to avoid distressed properties or properties in bankruptcy.
3. Choose your location carefully in terms of demographics: strong income, age, and area of exponential population growth should be preferred.
4. Look for properties that have at least 80% occupancy.
5. The diversity of Tenants is preferred since it allows you to mitigate risks.
6. For leverage purposes, it is preferable to aim for 50 to 65% Loan to Value or, if you prefer, have at least 35% down payment if you are not an all cash investor.

Keep in mind that these are only guidelines and that investors should carefully consider and research their options, and always enlist professional advice!