Single tenant store investment

11 Replies

Hi,

I would like to know if anyone can share with me the knowledge on the single-tenant store investment, such as the Family Dollar or General Dollar. What should I look for and how would I know if this is a good investment? Any feedback or info will be appreciated! Thank you!

Hi Bee,

I would be happy to share my knowledge with you.

3 main dollar stores are Dollar General, Dollar Tree, and Family Dollar.

Family Dollar has had declining sales the last few quarters as they went away from core offering for 1 dollar. They are still a solid company in many respects but Dollar General and Dollar Tree are stronger and there is a current bidding war for acquiring Family Dollar between those 2 companies as it will give them greater market share and locations they do not currently have.

The best loans are available on new dollar store leases. The new leases unlike years past do NOT have rent increases in the primary rent term. So a typical deal would look like a 2,500,000 dollar store and you have to put 25% down or 500,000.

The cap asking is 6.5% and a 15 year term primary lease with rental increases in the option periods.

Most dollar stores have construction quality that is not up to the same par as other commercial assets. Usually a brick or stone front with sheet metal sides and back. I used to like Dollar Stores when they had rental increases in the primary term. Now if you have 500k down you might as well buy a pharmacy such as Walgreens or CVS with 10% down.

You get an all brick building sitting on 2 acres or so and it's usually a major corner location. If you are not going to have rent bumps in the primary lease term might as well get the best quality you can with location.

I transact nationwide with clients. If you have further questions please post them here and I am happy to answer. I could go on and on but do not want to write a book as there is a lot more involved to NNN investing. If you want great cash on cash and NNN most of my clients are going after multi-unit strip centers as the single NNN buildings are compressed with cap rates currently versus I can get 8 to 9 cap with retail strip centers and quality tenants.

Hope it helps.    

  

HI Joel,

Thank you for your great info and insight. However, I do want to seek your advice on what indicators should I look for if the dollar retailer - Family Dollar or Dollar General, would do well in a certain location/city and the property value may go up? I understand the single family and multifamily market, but am new to the NN/NNN investment. Thank you in advanced!

Sure Bee.

Well the Dollar Stores by definition do not usually build in the premium locations and high median income.

The reason is for one high income earners do not want to be seen there. Number two the higher end markets the consumers go to upper end stores to shop. For these reasons Dollar stores tend to stay out of high end areas as it does not meet their demographic and the gross sales volume per store is low.

Dollar Stores generally build in poorer areas and then at the top mid level areas with median income of about 70,000 tops when the national average is around 54,000. These consumers tend to stretch that dollar more.

As far as going up in value the dollar stores are generally as I said before built with lower quality materials and are not located on the corner which is the optimum location. So this goes back to the fundamental principal that if you have 500,000 to invest. You would do better buying a Walgreens or CVS pharmacy for the same cap rate putting 10% down. You now have a corner location all brick on 2 acres versus a dollar store at 25% down that is far from  the corner and if it goes dark you will not get the rent per sq ft you had with the dollar store with the second generational tenant.

Not trying to talk you out of the dollar stores just personally knowing NNN single and multi tenants in depth it's not that attractive that I recommend to my clients. If you could explain why you are set on a dollar store maybe I could offer more insight.

NNN means no landlord expenses and hands off.

NN means parking lot, utility lines, roof, structure etc. depending what is in the lease that the landlord must maintain.

Bee-Bee,

Usually a Dollar Store, and to a lesser extent a Walgreens will drop in value the longer you own it.  A typical Walgreen's will have a 75 year lease without rent bumps.  The first 25 will be firm term.  You can get really good financing in the early years.  A developer of a Walgreen's could potentially get 100% financing when he builds the Walgreen's.  A new Walgreen's might trade in the 5s, whereas a Walgreen's in the last 5 years of the firm term might trade in the 9s and up.

With a Dollar Store, they may have rent bumps, but are usually built in rural communities or lower end urban and suburban communities.  They will be built with a brick front but typically a steel side and rear wall.  They usually pay above market rent for the location, so when the lease comes due, they have the owner over a barrel to renew.  I am sure if you ask Joel, he will tell you there are much better investments out there.

Mark

Just a minor observation: 

Although in many respects NNN are perceived to be safe places to put your money due to the guaranteed yield, the security of a locked contract and no rent increases doesn't come without it's downsides. When you buy a property with such leases you are taking an implicit long term bet in a low inflation economy. Just be aware that there is a possibility that your real returns can diminish significantly if the economy shifts into a slightly higher inflationary period and make sure that when buying you have a spread that can accommodate this possible change.

I have the experience in the single-home and multifamily investment, so I get that collecting the rent, and use it to pay the operating expenses and mortgage. And over a few years, some of the equity is paid, and the property is also appreciated (if bought at the right price and time).

I was presented this Dollar Store investment opportunity. At first it seems like much less hassle than the multifamily, that is with the NN lease. And the cash flow looks good too. The cap rate was 8-9%, and remaining primary lease term 6-10 years left, with 5 years bump options. All the points mentioned by Joel, Mark, Alex & Frank (very great points and thank you!). But I also have to think of what my exit strategy should be. Assuming I invest it for 5 years, enjoy the stable cash flow (not accounting for the inflation), but will I be able to sell the same price (if the value not appreciating) as I first bought it? What should I expect the appreciation rate for the type of property and what is a sensible exit strategy.

Bee-Bee,

Your exit strategy is to hold the property long term and hope they renew the lease or sell it for less than you purchased it.  Dollar stores lose value as the lease period runs down and with current cap compression, values are at an all time high, so you would most likely be over paying.  

Mark

Hi Bee,

Let's break this down.

Dollar Store

"The cap rate was 8-9%, and remaining primary lease term 6-10 years left, with 5 years bump options."

The remaining primary lease term is either 6 or 10 years it can't be both. Whether it's 6 or 10 years makes a MASSIVE difference on financing. Bank lenders look at what we call the "dark value" on an appraisal. This means if the property goes dark and the option period isn't renewed what will be the remaining loan balance in that final year after down payment and principal pay down??

The answer is the lender will not want to give you 25% down. They will want 40% down which will make your cash on cash returns very small and also hit you with a 15 year amort. instead of a 25. They do this because they want to accelerate pay down so they can dump the building quick if it goes dark and recover almost all the loan balance on default.

The property being a NN means depending on the lease you are obligated for roof, structure, parking lot, utility lines, etc. DO NOT underestimate what these costs would be as they can run over 100,000 or more.

So when you factor in a short term lease, more than 25% down, shorter amort. schedule, low cash on cash, huge capex upcoming, and likely the lender wants recourse then it's a loser of a property unless it's a corner with highly valuable dirt.

This is why my clients come to me because I understand finance and returns possible with properties. Most clients are not paying all cash and putting money down. The lease and credit tenant quality dictates the loan which dictates your returns.

NNN single tenant bottom was 2 to 3 years ago when my clients bought. Now the bottom is in the retail strip centers. My prediction which I am great and seeing ahead for markets is that retail strips will cap rate compress and increase in value in the next 1 to 3 years like single NNN did. There is a process where buyers buy at the bottom of a recovery cycle and hold and then sell when the cycle gets hot to buy another asset at the bottom again.

The key is many buyers do not understand how to spot a deal and the finance aspect.

I hope this helps you. This is generally why I have a conference call with clients and I tell them to let me search for them rather than sending me a bunch of stuff that doesn't work but they do not know what they are looking at etc.    

Joel,

Nice post, I am adding some comments.

It has to be a 6 year lease as a 10 year lease would sell for more than a 9 cap.  On a 6 year deal, in terms of financing, you would be lucky to get a 5 year term with a 15 year amortization.  The loan would be recourse instead of non recourse.  The location would be important as a lender might pass right away.  The typical dollar store looks for low demos and a lender might not want to risk taking the property back.  Most Dollar stores pay a significantly higher than market rent and when the lease comes due, they will move if they don't have really good numbers.  I would make sure you can get store numbers.  Also, I would not buy a dollar store if you are close to another competitor dollar store, as if they complete a purchase (Dollar Tree or Dollar General or Family Dollar), they may be looking to close one of the stores.

Mark

Thank you for all your responses.

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