LOS ANGELES—Retail developers often come to us with their hopes and dreams for creating the next best real estate development project. Many developers are artists hoping to create something that improves the communities and/or cities in which they are built.

For retail projects there are many market challenges. Internet sales have taken a bite out of the bricks and mortar retail market. The amount of retail space in the US stands at 23 square feet per capita—ten times that of France, the global fashion capital of the world. 

Despite those challenges, there are still many opportunities for developers to create great spaces with their vision, whether it's through redevelopment, or in some cases ground-up development.

The challenge for many developers in today's market is identifying the right way to finance these retail development deals.

At George Smith Partners, we have a number of very successful retail developers who are financing deals in today's market. The fact is, these deals can get done on a select basis if they have the right location, design and development team—and if they are financed creatively.

The answer lies in unique financing structures.

The fact is, most conventional banks will require 50% preleasing and very strong personal recourse in order to begin any ground up or major renovations on a retail project.

However, there are a few select lenders who will fund retail projects on a non-recourse basis, or with limited pre-leasing for the right project.

For example, we are currently processing non-recourse financing for a to-be-built, 200,000-square-foot retail center in Orange County with limited pre-leasing. We also recently closed a $50-million non-recourse financing on a mixed-use office/retail/apartment project in Palo Alto, also with limited pre-leasing. 

While the cost of capital can be more expensive in these cases, it can result in a far greater profit than would taking on another equity partner to sign recourse.

For many high net worth clients this strategy, even with its higher cost, is preferable to taking the risk of recourse financing.

Some retail projects have substantial preleasing from credit tenants, making them easier to finance.  However, even these projects can come with their own challenges, including the question of whether or not today's credit tenant will still be credit tenants when the developer is ready to sell the property.

Another factor to consider is how much of a reduced rent a sponsor will need to accept to get tenants to prelease space early.  This lower rent has an effect on the value of the property and can lead the sponsor to accept higher priced debt to avoid the preleasing requirements and subsequent lower rents.

Regardless of the specific strategy, today's retail developers should be proactive in asking about how they might creatively structure their financing.  By considering these uniquely structured finance deals, many of today's developers will be able to move their next big project forward in a more cost effective manner.

Steve Bram is principal and managing director of George Smith Partners. The views expressed in this column are the author's own.