RCA in the commercial property press:

Retail Property Sellers Opt to Offering Financing to get Deals Done

Retail Traffic reports: In today's troubled financial climate, it isn't easy to sell shopping centers. But some property owners—because conventional financing is scarce—have gotten creative and begun to finance sales themselves.

For example in April, Jim Glabman, owner of an empty retail building in Costa Mesa, Calif., offered $5.5 million, seven-year mortgage to prospective sellers in an attempt to move a 40,000-square-foot, two-story property. That's not the ideal scenario for Glabman. In good times, he would lease the property and up and collect the rental stream, according Philip Voorhees, senior vice president at CB Richard Ellis in Costa Mesa, who is trying to broker a deal for Glabman. But finding tenants—especially for a fully empty center—is extremely difficult.

But by offering a mortgage, Glabman may be able to replace that income stream. If he sold the property for cash, he could get as much as $7.5 million in a best-case scenario and then earn 2.0 percent to 2.5 percent interest by investing the proceeds of the sale in government or corporate securities, says Voorhees. "By carrying paper, he will earn 6.5 percent," he says.

Glabman's situation is typical of how seller financing is functioning in today's market. In most cases, the deals are on properties selling for $10 million or less. However, there are exceptions. In recent months, 47 percent of the total transactions are being financed through assumed debt and another 7 percent through seller financing, according to New York-based real estate research firm Real Capital Analytics. (See a chart published in mid-May on how the sources of acquisitions financing have evolved.) At the market's peak, just 10 percent of transactions were financed through assumed debt and less than 1 percent through seller financing. However, seller-financing is not completely transparent because not all deals are recorded, says Dan Fasulo, managing director at Real Capital. Moreover, many sellers don't have enough equity in their properties to be in a position to offer a mortgage, says Voorhees. This is one reason why—despite its rise—its overall use is limited.

This rise in seller financing is coming a time when investment sales volumes on retail real estate have virtually collapsed. For the first three months of 2009, sales transaction volume for retail properties worth $5 million or more amounted to $1.9 billion—off 75 percent compared to the $7.2 billion in the first quarter of 2008 and 90 percent off the $18.8 billion in the first quarter of 2007, according to Real Capital. In some markets, volume has fallen off even more than that. For example, in the Chicago area, just two retail properties for a combined $12.5 million traded in the first quarter.