New Development

11 Replies

I've been seeking to sign many new leases for my growing restaurant chain. Largely due to a larger competitor ousting my bids (has a corporately guaranteed lease.) I'm running low on good opportunities to expand to. Any advice on how to get a better ear on new developments. We are open to most of Orlando but really interested in Lake Nona, Oviedo, maitland, and ocoee.

Hey @Adam McLellan , the Orlando Business Journal.  Anything going on business or development wise is covered in there, along with new building permits pulled.  

Hi Adam,

That is tough.

You have to figure in simply paying more in the lease to make yourself attractive to a land owner or a developer.

You have to see it from their perspective. I am buying the land to develop the parcel out. As the developer I want to extract the best value for the "highest and best use" of that parcel.

I have what is called my "5 levels" of security.

1. Parent corporate guarantee on the lease backed by a BBB- or better investment grade company. ( think thousands of locations guarantee this one location so it does not matter it loses money as they still pay the lease to protect the credit rating and borrowing power etc.)

2. Subsidiary of parent corp. ( think Taco bell with 200 locations in one state etc.)

3. Large franchisee with a track record and hundreds of stores.

4. Small franchisee with a new store or stores.

5. No franchise concept ( Joe's tacos ) being lowest security and hardest to finance.  

The developer has their all in costs  for cap rate and then the selling cap rate to an investor buyer putting 25 to 35% down on the primary lease for the income stream. The stronger the national tenant and guarantee the lower cap rate generally the developer can sell for.

If I have to pick a smaller unknown restaurant local to  a market in expansion mode versus a national one I have to get a lot of concessions from the restaurant. A national tenant might agree to 1 percent annual increase to 1.5%. A local restaurant needs to be at 2.5% to 3% annual increases to make it sellable for a developer and appetizing for an investor to purchase from them.

If I get a corporate guaranteed Taco Bell at a 7 cap for  a new lease with 1.5% annual increases that can be a great deal. In that case likely 25% down to buy a property as an investor.

If it's a small franchisee I want to see a higher cap or 2 to 2.5% annual increases because a lender will likely want a higher DSCR and 35% down to offset risk of the less desirable guaranteed operator.

If you are not willing to put in annual increases that are hefty to land the best locations then you will need to settle for the less desirable locations to structure the lease the way you want or lose out to national companies.

Two opposing forces are your risk as a growing restaurant and my risk as a developer.

You might or might not see restaurants as wanting to split out risk. Say you have 100 restaurants. You might get advice from your attorney to create subsidiaries for small groups of restaurants so that the bad ones can be dumped without affecting the good ones.

As a developer I take the opposite view. I want all your stores and you guaranteeing personally the lease. I want to see audited financials for all stores to see the health of the organization. Are they growing too fast and too soon? Will they go boom and bust?? How deep is the operators pocket with a personal guarantee and will they be able to float the business for awhile if problems occur?? Is the sales to rent ratio annually at 10% or below??  ( example 100k annual rent on 1,000,000 or greater store location sales ).   

I want the most security I can get from the operator. I want to know if this location the tenant signed a lease on becomes a dog it won't matter if it loses money because I the landlord have their flagship stores on the hook making bank propping up my lease revenue stream to get paid.

It's a tug of war to find middle ground between the developer and the operator to do a deal.

Hope it helps.


Hey Adam,

I'm not sure of your exact business, but it sounds to me like you need a commercial broker who specializes in retail and is deeply knowledgeable and connected in your market. If you need a referral, I can recommend a couple of good ones in Orlando. Again, I don't know your exact business, but you might want to check out ICSC. The annual deal-making conference is coming up, and is very well-attended. Retailer One on One is also a good one. If you need an architect, I can recommend a great firm for this segment - especially if you have a multiple site rollout. Feel free to message me.

Good luck!

By no means are we a small franchise. We currently have 22 locations and am willing to grow at a quick rate. Unfortunately the franchisor simply doesn't offer the guarantee that all of my competition does. We have restructured the businesses to reflect larger sales numbers as you stated, but it doesn't help much. Our sales are great. All QSR's are expanding and I'm stuck to compete without this guarantee. You can see my frustration with the franchise for not offering this for a such a national brand. Personal guarantee, annually increase, cap rate don't seemed to matter when a similar concept with a guarantee jumps in. I only land the deal if we get a jump on the offer. I've looked at Orlando business journal, may be I should pay more attention to it.

Adam it does matter.

I review over 500 properties a week in triple net. I eat, live, breath that space day in and out.

If you want a primary lease term you have to pay more rent and give higher annual increases or you have to back off of the cherry locations when talking with a developer/owner.

Why don't you just buy older buildings to do demo and own the land and building and then do a sale-leaseback situation to get your capital back?? You can also convert an existing building that is dark to your model in a good location. Other options available as well. You just need to connect with someone that can give you alternative options that work.

In this way you do not leave it up to an owner or developer which concept they sign for the lease  and leave you in the dark. Remember for resale value is tied to the primary term of the lease  and who is guaranteeing it. If you have 22 restaurants it might sound large but it is small in comparison. A pizza hut parent corporate backed has over 10,000 locations etc.

Just for everyone's information with triple net restaurants have the shortest survival life cycle out of all the asset types. Pharmacy, banks, dollar stores, auto stores, etc. last longer on average. Even strong national restaurant company brands might die out after 15 or 20 years. Food fads and concepts go in and out very fast. 

@Adam McLellan

It would help to clarify what the name of your restaurant is. Is it a franchise or just a mom and pop? If its mom and pop, very few developers will build for you. I'd rather have Starbucks pay me $300,000 in rent then you pay me $400,000 in rent. Its because Starbucks is a strong credit and the name alone has value. If you have a franchise flag and are a large operator you will get some interest. For example, if you own McDonald's franchise, you will have every developer in Florida begging you to build for you. It all varies.

Moe's Southwest Grill & chipotle is killing me and are getting prime location on me at every turn. Don't get me wrong, I love chipotle. But some of these bids have been better yet I can't get around the guarantee. I think corporate will come around on this for larger franchisees but not anytime soon.

@Adam McLellan

I love Moes and prefer it to Chipotle. Huge fan of the sauces. If only you were looking in the Mid-Atlantic, hell, I could even do a build to suit for you up here. There was a Moe's in the town, but it went under, which is surprising cause there was always a line. I think the location was a poor choice. 

It's not just about the corporate guarantee.

Chipolte trades at very low cap rate with newly minted leases. As a developer I have the same cost in the land I buy. What drives value is my highest and best use for that size parcel selling off.

A Chipolte will sell at  a lower cap rate for more profit usually in the 5 cap rate range. A Chick-fil-a even better at a 4 to 4.5 cap rate.

I mentioned before you are going to have to get creative. BUY the land and develop the building yourself. Stick your restaurant in there and do a sale leaseback with a long term lease.

@Joel Owens

 that was my thought just build your own ... why rent at all now that he has mass and scale

Jay the reason is as expansion happens these corporate restaurants tend to run out of capital.

So they franchise off to keep growing. So this person sounds like a franchisee growing within their system and expanding.

After you buy the land and build out the restaurants want to recapture the sunk cash. So they do a sale leaseback. Now that the company has a lease they can take accountable deductions each year as a line item expense.

FASB has been talking about changes to the rules for years making companies account for the full lease value obligation on the books. This might make companies shorten the period of primary lease term signing or decide to own the real estate themselves outright.

The companies want the liquidity so they do not have high capital sunk into owning the real estate. They can stay fluid and jump to better locations if they do not want to renew options and can also sub-lease to another tenant if they want to move before primary lease term ends to a better locations. Sometimes they will even let a place go dark and keep paying without releasing if they can move and open up in a stellar location. They want liquidity for operations and growth and not sunk into equity for owning real estate.   

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