How should you evaluate and purchase a retail property by yourself? Where to get started? Jessica Malcomnson purchased two retail centers in the last couple of years and shares her journey, lessons learned, and insights with us.

Tell us a little bit about you.
My commercial real estate career began in 2006, I was hired by Chuck Taylor with Madison Marquette. He hired me as an office manager and within a few months, I was promoted to property manager. I managed grocery-anchored shopping centers for the company and did that for five years. I then made the decision that I wanted to get into leasing and I was hired by Stiles, which is a local developer based in Fort Lauderdale. I was with them for a short time, and then transitioned over to Equity One where I was their regional director of leasing for their South Florida portfolio. And at that point, Equity One was sold to Regency Centers and my position was eliminated in 2017. And that's when I decided that I wanted to get into investing on my own.

Up until then you're saving up money, and you decide to buy your first property. Can you guide us through that process?
When my position was eliminated in 2017, I was at a crossroads in my career, and I wasn't sure if I wanted to go work for another large firm, if I wanted to work for a boutique firm, or start my own. Financially, I had the money available to start investing, and I actually started out with a single family investment. I then also picked up short term rentals, office, and a warehouse building. My dream was to own shopping centers, and in 2019 was when I really began the journey to invest in shopping centers. And I realized at that time that, because I had taken some time off, I knew that I had to get back in the business, my career had lost momentum from a leasing perspective. But I knew I had to get back in and start networking with the brokers who are selling the real estate that I'm looking to purchase. So in 2019, I started to get back in to attending networking functions, local ICSC events, just so I could get my goals out there and also network with the brokers who are selling shopping center.

How did you get your first few loans because a lot of lenders don't want to lend to people who don't have a full time job.
That was one of the challenges. I'll start with my first shopping center that I purchased in 2019. This was going to be my biggest purchase to date, and the lending process was new to me. Originally when I started the process, the broker that I was working with, Joe Russo of Marcus and Millichap, was fabulous throughout the process and really held my hand in every step. I never at any point felt like he was doing this for financial gain, he always did this as though he was a mentor or friend of mine. He referred me to a loan broker at Marcus and Millichap as well. And that's where my process started.

When you're getting a loan, you have to know that they want to see what kind of experience do you have. I don't think they want to lend it to someone who doesn't have any experience whatsoever in leasing or managing a shopping center unless you plan on hiring a third party company to do that for you. That was always the first question, what kind of experience do you have in the shopping center business? I certainly checked that box. And then, from a loan perspective, they look at your financial statement. Once you can check those two boxes, the next thing is to find a property. Once we have pre-approval from the lender, or from a mortgage broker, the next step is to go out and start looking at properties. Certainly, I wasn't going to start looking until I had that pre-approval. I checked all the boxes that are needed for a lender, just like when you're buying a house, you need to have the pre-approval, the same thing has to be done with commercial real estate. Once that was in place, Joe really held my hand at looking at properties for sale on the market. He was really kind, when we started this journey, he would send me an OM of a strip center for sale, he would set aside an hour of his time, and go over everything financially about the property with me. And that was very helpful. Now remember, my background is in leasing and managing, I didn't have much experience in acquisitions or dispositions. And I was never shy to share this information that I was new at purchasing. He held my hand and really explained thoroughly how the financials work, from the aspect of purchasing the property for lenders approval, to what my return on investment will be at the end of the day, or at the end of the year. He also dove into the underwriting of the property, how brokers do it, what to look for, what to account for that maybe is not there, questions to ask, etc. He was very helpful holding my hand throughout that process of purchasing my first property.

What was this first opportunity and what was the upside of it? Have you experienced any challenges so far? What did you see in it? Take us through the step by step of purchasing it so people can understand how you went through that process initially.
The first shopping center that I purchased, looking at photos of it, I was thinking that it's probably not a property that I want to purchase, but once we dove into the financials, I realized that this is something that should be of interest to me, I can't judge it just by looking at the photos. I decided to take a road trip to visit the property, I'm located in South Florida, the property is located in the Jacksonville market, that's roughly a four to five hour commute. I remember standing in the parking lot, sometime around two to three in the afternoon, seeing the amount of traffic passing by the property. It was also located at a lighted intersection, next to a McDonald's, across the street from a Walmart neighborhood market. I said, "Wow!", I was willing to pass on this property just based on photos because it's not "sexy real estate". But now I'm here standing in the parking lot looking around and noticing everything that's happening, and then I realized that this is something that I need to pull the trigger on.

What else was the upside, besides the pictures not looking great?
When I started my investing journey, I wanted to target multi tenant strip centers, 10 or more tenants. This property consisted of three buildings, and with that, there were six end caps with three buildings. I also know from my leasing career, what retailers look for and what's good even for mom-and-pops with the traffic counts, visibility to the road, and the adjacent national tenants that are in the market. Those things were upsides for the property. It did need a little bit of work, it needed a new paint job, some roof work, but otherwise, it was a solid property that I knew I could lease and manage, and it also had two vacancies. So there was upside with the vacancies, as well as increasing rent with the existing tenants.

The property actually had five month-to-month tenants, and anyone would recognize that not only as a risk, but also as a potential upside. Looking at the rent roll, I remember seeing five month-to-month tenants, and they've been at the property for over 10 years. With that being said, I knew I could renew these tenants, even if it was, worst case scenario at their current rate, I knew that these tenants would renew, they've been there 10 years, they're mom-and-pops, I know what's in the market, I knew that there wasn't another shopping center that they could go to at these rates. That was a risk that I took, and it worked out in the long run, renewing them with increases.

Did you go through some challenges? What were some of the unpleasant surprises of that deal?
The first surprise during the acquisition process was the mortgage broker that I was originally working with, on the 11th hour, the lender that he was working with, could not get approval for the loan. I was left uncertain if the deal was going to continue at that point. So I called a friend of mine in the business, and she had recommended what to do. I don't have loan approval, and I believe we were two or three days away from the end of the due diligence period, she had said "you have to get an extension on your contract", which is what we did. I dropped all other contingencies of the due diligence and just extended the period to get loan approval.

They did not approved me then because I had never owned a shopping center, even though I had a very long resume of leasing and managing. It was also with a credit union, I feel like with the credit unions, everything has to fit perfectly in a box, and I just didn't fit perfectly in their box. With that being said, I jumped on the phone and started calling lenders directly myself, I had a list of five lenders that I got out of the South Florida Business Journal. There was a recent publication that showed the lenders that had the most commercial loans over the last 12 months, so I just started cold calling these lenders, as well as some others that friends recommended. And that's how I found my lender, I eliminated the mortgage broker and decided to do it myself.

We also tried to negotiate with the credit union, I was willing to put up X amount of money into an escrow account to make them feel more comfortable to move forward with the deal because I knew I was three days away from being able to terminate my contract. We definitely tried to negotiate with the first lender and they weren't interested. The lesson learned there is to never put all your eggs in one basket and always have a backup. I had to scramble at the last minute to find the backup.

Now that shopping center is doing well and you decide to get another one. How did that one go, was it smoother than the first one?
I don't think any transaction is smooth, I feel like there's always bumps in the road. But yes, so the second shopping center that I purchased, which is in the same market, the Jacksonville Market was easier. I used to drive past that shopping center every time I was on my way to visit the first one that I bought, I used to see it and I knew it was under-leased and under-managed. Then the property came up for sale on Crexi, I see the photo of the shopping center, and I knew exactly where this was located. I knew all about the shopping center, I know the market. It was listed for one day on the market, and I reached out to the broker selling the property, and he happened to be a previous tenant of mine from my property management days, he was now a broker, but previously he was owner of a Japanese restaurant at a shopping center that I used to manage in South Florida. That's the full circle of real estate. He was one of my tenants, I was the property manager, he decided to get out of the restaurant business, and start selling real estate, and he lists out that shopping center for sale. It was good that we had that connection, because I knew I was the front runner as a buyer.

Why do you like retail?
I prefer retail because that's where I spent 10 years of my profession, my career was in retail real estate. So naturally, I was drawn to it. I understood the basics, the leasing and the managing, and I knew the reasons for rent increases and the reasons that we track NOI. I was drawn to it because I knew I could play a role in leasing and managing it to create value. So that's why I'm drawn to retail, and why this is the most comfortable asset class for me. Another pro is, when you own multifamily, even short term rentals, single family investments, you get those calls, "the microwave isn't working, the garage door opener isn't working, there's a leak under the sink", where in retail you don't get those calls, everything inside the space is handled by the tenants. You get less problematic calls than you get with residential multifamily.

Can you go over some of the cons of this asset class?
One of the issues that came up, after I purchased my first shopping center was that the insurance company that I used sent an inspector out within the first couple of months. They do a full inspection of the property, and they come back with a list of items that they want taken care of in order to continue with the policy. And that was a big surprise, I never had that issue with any of the properties that I managed in the past. With the first property, they hit me with requiring a reroof of the property because the roof was old, and I knew that before purchasing the property. But it was also watertight, and we weren't having any issues. Why would I want to replace something that I know we're not having any issues with? We ended up discussing with the insurance company and they accepted a seal coat of the roof. That was a huge expense that was not expected, it came up a few months after purchasing, where you don't have the reserves built up, and that was a big surprise.

Is there anything else that you think is important for our audience to know that we haven't covered, maybe an advice for people starting out, or for people that are just getting into the industry, or that have purchased a couple of properties? 
I think it's pretty self explanatory, but my advice would be to have a mentor, or several mentors that you can call on to talk about struggles, bounce ideas off of. Without that, I don't think I would have closed on my first property if I didn't have someone to tell me to extend my contract in due diligence. Always have someone that you can call on and talk to in order to bounce ideas off of and help you through those road bumps.

Jessica Malcolmson