Pad Sites

Definition of Pad Sites

A pad site, often referred to in the industry as an "outparcel," is a standalone parcel of commercial land located at the front or perimeter of a larger shopping center, mall, or mixed-use development. These sites are strategically positioned to provide maximum visibility to passing traffic and are typically occupied by a single-tenant building. In the context of commercial mortgages, pad sites are viewed as premium assets due to their accessibility and high-profile locations.

Detailed Description of Pad Sites

Pad sites represent a specific niche in commercial real estate development. While they are physically part of a larger retail ecosystem, they operate independently in terms of structure and often in terms of financing. These parcels usually range from 0.5 to 2.0 acres and are designed to accommodate businesses that require high turnover and easy customer access.

Common occupants of pad sites include:

• Quick Service Restaurants (QSRs) with drive-thru windows.
• Financial Institutions and standalone bank branches.
• Automotive Service Centers or gas stations.
• Pharmacies or convenience stores.
• Coffee Shops and specialized retail boutiques.

Financing and Commercial Mortgage Considerations

When underwriting a commercial mortgage for a pad site, lenders look at several unique factors that differ from standard retail center financing:

• Ground Leases: Many pad sites are financed via a ground lease structure. In this scenario, the developer owns the land and leases it to a tenant who builds their own facility. Lenders must carefully evaluate the "leasehold interest" and the remaining term of the lease to ensure it covers the duration of the mortgage.
• Cross-Access Easements: Because pad sites are located within a larger development, they rely on Reciprocal Easement Agreements (REAs). These legal documents ensure the pad site has permanent rights to use the larger center’s entrances, exits, and utility lines. A lender will require these to be clearly defined to protect the property’s value.
• Creditworthiness of the Tenant: Pad sites are frequently occupied by national credit tenants (e.g., McDonald's, Starbucks, or Chase Bank). The presence of a high-credit-rating tenant often allows for more favorable interest rates and higher Loan-to-Value (LTV) ratios because the income stream is considered highly secure.
• Alternative Use and Liquidity: From a mortgage risk perspective, pad sites are considered highly liquid. If a tenant leaves, these parcels are generally easier to re-lease or sell than a large "big box" retail space because the building size is manageable and the location is desirable.

In summary, a pad site is a high-visibility freestanding parcel that offers unique advantages for both developers and lenders. Its value is driven by its prime location, the strength of its individual tenant, and the legal framework that connects it to the surrounding commercial infrastructure.