Free Standing Retail

Definition of Free Standing Retail

In the context of commercial mortgages, Free Standing Retail refers to a single-tenant commercial building situated on its own individual parcel of land. Unlike a shopping mall or a strip center, these properties are not physically attached to other retail units. Because the property is occupied by only one business, the commercial mortgage risk is tied directly to the financial performance and creditworthiness of that specific tenant.

Key Characteristics of Free Standing Retail

• Single-Tenant Occupancy: The property is leased to one brand or operator, such as a pharmacy, fast-food restaurant, or bank branch.
• Triple Net (NNN) Leases: Most free standing retail properties operate under Triple Net agreements, where the tenant is responsible for property taxes, insurance, and maintenance costs in addition to rent.
• High Visibility and Access: These buildings are typically located on "out-parcels" near major intersections or high-traffic corridors to ensure maximum brand exposure and easy customer parking.
• Credit Tenants: Many of these properties are occupied by national corporations with high credit ratings, making them attractive to lenders who prioritize stable, long-term cash flows.

Commercial Mortgage Underwriting Considerations

Lenders view free standing retail differently than multi-tenant assets. The primary concern is lease term alignment. Because there is no diversification of income, a lender will typically require that the remaining term on the lease exceeds the term of the mortgage. If a tenant chooses not to renew their lease, the property owner is left with a 100% vacancy rate, which presents a significant repayment risk.

To mitigate this, underwriters focus on the Credit Tenant Lease (CTL) structure. If the tenant is a high-credit national brand, the borrower may qualify for more competitive interest rates and higher Loan-to-Value (LTV) ratios. However, if the tenant is a local or "mom-and-pop" operator, the lender may require additional collateral or more conservative debt service coverage ratios (DSCR).

Advantages and Risks for Borrowers

For investors seeking a commercial mortgage, free standing retail offers the advantage of simplified management and predictable income. However, the risk of re-tenanting is the primary drawback. If a specialized building—such as a fast-food restaurant with a drive-thru—becomes vacant, the owner may face high capital expenditures to renovate the space for a different type of user. Therefore, the intrinsic value of the real estate and its "re-leasability" at market rates are critical factors in the mortgage approval process.