Flex Space Feasibility Study in Arizona

Arizona flex: bigger loans and a high cancellation rate

Arizona's flex-bearing lessor class holds 45 loans, worth $46.5 million, between FY2017 and FY2026. Arizona is 12 of 51 states in this class and the class is 18 of 39 among those financed in Arizona. The location quotient of 1.40x shows an above-average concentration. Median loans of $869,200 run 1.45x the national figure for the class, and half of the loans fall between $416,000 and $1.2 million. Arizona investors borrow in sizes well above those in most states.

The lessor code and the FY2024 stop

Flex space is entangled with office and retail lessors, as flex, office, retail and banquet-hall uses are filed under a single industry code. This lessor class nearly stops from FY2024, and the yearly record shows it clearly: 16 loans and $15.4 million in FY2021, 5 in FY2022, 3 in FY2023, and then no loans at all in FY2024, FY2025 or FY2026. The absence of recent lending is a policy fact, not a verdict on Arizona's market. Anyone using this cell should rely on the earlier years.

Of the 45 loans, 44 sit under 7(a) and 1 under 504, and 2.2% are franchised. Enterprise Bank & Trust shows 10 loans and $9.5 million, and Sunflower Bank National Association 7 loans and $10.3 million. Sunflower's dollars exceed Enterprise's on fewer loans, so it handled the larger buildings. Maricopa County has 35 loans, Pima 5 and Mohave 2, so this is a Phoenix-area market. The cancellation floor is 24.4% for FY2017 to FY2024 approvals, with an identical ceiling, the highest figure in this group. No Arizona charge-off rate is printed; 30 seasoned loans were not available.

What an Arizona study must test

The study must establish what kind of building it is: flex, office or retail, because each has different tenants and different risks. Demand must come from submarket vacancy and rent, along with tenant concentration. Cost should cover tenant improvements and the roof, mechanical systems and parking. Coverage must be run on actual leases, with a case for the loss of a major tenant, and with a realistic lease-up for any vacant space. A cancellation floor this high suggests deals fail at closing, so the study should document the site, title and environmental condition early. An appraiser should treat the building as an income property and say what debt that income carries.