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SHOPPING CENTER LOANS

Commercial Investors need a company that specializes in navigating the complex requirements unique to financing shopping center properties. Ocean Pacific Capital has provided the best financing for shopping centers in the U.S. and abroad since 1977.

A pricing model has been developed over time for shopping center mortgages. This pricing model has significance for shopping center investors and buyers looking to determine the correct level of the loan to value ratio as a buydown on the interest rate to be charged. It is relevant for the shopping center lender for the equilibrium interest to be linear in the riskless rate, production costs, and the price of the default and reinsurance options. Once thesee options have been priced, the lender will then determine the interest rate. By pricing separately the components of the mortgage, they can be restructured into tranched securities, which introduces the possibility of securitization and increased liquidity.

The adjusted-for-risk rate of interest is dependent on short term riskless rates, with the movements in returns to shopping center investments, LTV ratios, and capital requirements at the lender. An option structure exists inside a shopping center mortgage. This structure includes an income security and two put options, one sold by the lender with a relatively high strike price for the borrower to default and the other bought by the lender with a relatively low strike price at which the lender may reinsure.

This structure has been applied to shopping center markets and their representative financing programs. It can be expanded to cover other forms of loans and to determine optimal reinsurance premiums. In reality, lenders and private investors are not often able to reinsure directly, except in the form of the ultimate put to deposit insurance.

Shopping centers involve relatively large loan sizes, and the conclusion that relatively high production cost lenders must charge disproportionately high interest rates may place pressure on their borrowers. Given relationship lending, it is difficult for borrowers to switch lenders after an unanticipated rise in production costs. Rather than carry a large risk on one borrower, the lender requires low loan-to-value ratios that appear onerous, but are consistent with optimal behavior.

The lower put price is for the reinsurance against lender default. If there were comlete coverage of all default risk by a third party, such as the federal government, as is the case with residential mortgages underwritten and reinsured by Ginnie Mae, then the mortgage rate would only include prepayment risk above a riskless rate. Observed mortgage rates must includea a premium for the default risk that cannot be laid off with a reinsurer. Hence commercial mortgage rates, including those on shopping centers, include pricing for default risk.


For more information on a commercial shopping center loan , please contact us. For a listing of our recent commercial construction loan closings, please click HERE.


Whatever your financing needs,
we will tailor a loan that's right for you.

 

Wall Street Journal
Commercial News

1/22/21

WSJ.com: US Business

Intel to Outsource More Production
The chip maker, which is reviewing its production strategy, reported a slight drop in earnings for 2020, but sales hit a record high of $77.9 billion.

Amid Housing Boom, Demand for Small Spaces Grows Too
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IBM Pledges to Return to Growth in 2021
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Purell Maker Bets Sanitizing Habits Outlast the Pandemic
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Want to Be a Hollywood Player? Covid and Streaming Have Changed All the Rules
Movie studios have quickly embraced streaming in the pandemic, and that?s shaking up who?s in charge, how contracts are set up and how stars get paid.

Biden to Sign Orders to Boost Covid Aid, Federal Benefits
President Biden plans to ask agencies across the government to take steps to enhance federal benefits, such as expanding food assistance and improving the distribution of stimulus checks.

Eurozone on Brink of Another Recession Amid Covid Wave
The eurozone economy has suffered a weak start to the new year, with high coronavirus infection rates and government restrictions increasing the risk of a second recession since the pandemic first struck last year.

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Charles Elfsten, President
Charles A. Elfsten
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