Investor · Sunnyvale, CA · Member since 2015 · 39 posts · 9 votes
When purchasing a NNN restaurant what do you look for during due diligence and visiting location?
I know we'll do Phase 1. We'll get financials from franchise few years back (how many years to ask for? They have been on location many years, it's a lease back). What else? When visiting location what do you look for?
Also, How important is it to have a detailed LOI? Since seller will most likely counter with their own LOI.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
There are some LOI's where certain parts could have binding language upon you that could be detrimental.
Also the sellers LOI's tend to be slanted for the seller. The ones I use have it where they cannot except other offers from other buyer while under our LOI.
This blocks out other buyers from submitting higher LOI's and having the seller try to jump ship or play you against the other offer to try and get you up on price.
If you have the property locked up under LOI for say 3 or 4 weeks then the seller is more willing to negotiate on the PSA during that time and loses leverage.
So LOI is important in how it is structured.
The attorney needs to be a commercial attorney specializing in retail. Mistakes can cost you big money.
Are you not using a commercial buyers broker? Seller has accounted for the commission anyways and so has the listing broker if they have one.
So basically you have no benefit to not using a buyers broker in your corner.
Real estate investor · Las Vegas · Member since 2013 · 798 posts · 171 votes
9y
Also curious to what items people are concerned with on site for a true NNN lease. I would assume the rent, lease length, lease clauses, the tenant, the history with tenant at the location, the quality of the building, the car count/surrounding population, and the ability/cost to repurpose would be much more important than what you would find on site, but I really don't know. @Joel Owens would be a good person to ask about the LOI and due diligence.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
I wouldn't care about years of financials. I want to know what they are doing within the last 12 months. I then compare that to the franchise store chains national average. Is that locations stores sales at, above, or below the franchises average??
Has the store been recently updated to a new look inside and out? How old is the equipment in the store? What is the rent to sales ratio for the lease?
You want to see 10% or below so if 1,000,000 in annual gross sales rent needs to be no more than 100,000 a year.
Who is guaranteeing the lease?? Is it a personal guarantee?? What is their liquidity and net worth? If the franchisee has other locations request to see those company books to see if their debt and expansion has grown too fast and they are in trouble. What are they doing to combat high labor costs in the future with minimum wage increases? Are they automating the order process with touchscreens at the front of the store?
How is the visibility from the road for the site? Is access easy to get in and out? If the lease is franchisee and multiple stores is it main corporate backing the lease or they just put this one store on it?
What are the rent increases per year? Does the rent go up every year or blocked every 5 years?
For example 10 year primary lease and goes up 10% in year 6. Usually fine for strong corporate but franchisee you usually want that rent going up every year so if they go out in year 4 you didn't have flat rent for 3 years.
Is the lease truly NNN? Some say that and it is NN. What is the primary length term? You want at least 15 years and not 10. This is because if you go to sell in five years the cap rate goes higher as the primary lease term goes down. Buyers and lenders do not count options because they may never happen and then you have a vacant building to lease up with tenant improvements and leasing commissions to pay for. With 15 years on the lease and you sell in year 5 or 6 you still have 9 to 10 years remaining on the primary term of the lease so still can usually get a decent cap rate on resale.
With the sale leaseback make sure the tenant is extracting market lease rates and not above. Sometimes they like to push higher rents on the lease back so they can pull more money out. They go boom,bust too fast and the space goes dark in a few years. If the lease was above market rates what you can likely re-tenant for then you stand to lose some of your initial down payment and equity.
This is all I do day in and day out as a principal commercial broker and retail real estate developer nationally for clients.
Additionally if this a 1031 exchange you need to have back up properties selected for your 45 day ID period in case this one falls through. I look for certain demographics,population levels, traffic counts, median incomes for an area when evaluating an asset and how much competition that product type has in the immediate area. For example if it's a burger place are there 3 other burger places close by or 10?
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
LOI the buyer generally uses the one from the buyers broker or their attorney. Be careful about what the seller or listing broker produces to sign with an LOI and then the purchase and sale to obligate you too.
What happens is generally we submit an LOI (with our form) and then if accepted under initial review period then start negotiating the purchase and sale. I always recommend a commercial attorney specializing in retail to negotiate the PSA and assist with closing. I am there the whole time in the transaction but the attorney handles the legal stuff.
Lender · Nat'l Commercial Mtg Lender - Round Rock, TX · Member since 2014 · 916 posts · 235 votes
9y
@Rina Amir Ask for 3 years of financials and a year to date P&L's and Balance Sheet, if the franchise is not well known ask how many franchise stores are on the ground, and the lease agreement. Most Realtors won't write up an LOI or release the documentation unless you have a pre-approval. Do you have a pre-approval to give the selling agent?
Before you visit the location you might want to get a feasibility study of the traffic flow, the population etc. to determine if the property is in a good location. The Realtor might have already done a feasibility study for your use. If the the Realtor can't provide a feasibility study, you can contact the local SBDC or Score to help you (for free) with the feasibility study. The feasibility study can be used for the lender in helping them decide if they want to lend on this property. The other reason you will want the feasibility is so that if anything happens to the franchise restaurant, you know you can get it leased fairly quickly.
Investor · Sunnyvale, CA · Member since 2015 · 39 posts · 9 votes
9y
Thank you all. @Joel Owens what do you mean to be careful what LOi seller uses? Purchase and Sale agreement will go to through attorney of course, but LOI usually doesn't right or should we have attorney review before signing?
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
There are some LOI's where certain parts could have binding language upon you that could be detrimental.
Also the sellers LOI's tend to be slanted for the seller. The ones I use have it where they cannot except other offers from other buyer while under our LOI.
This blocks out other buyers from submitting higher LOI's and having the seller try to jump ship or play you against the other offer to try and get you up on price.
If you have the property locked up under LOI for say 3 or 4 weeks then the seller is more willing to negotiate on the PSA during that time and loses leverage.
So LOI is important in how it is structured.
The attorney needs to be a commercial attorney specializing in retail. Mistakes can cost you big money.
Are you not using a commercial buyers broker? Seller has accounted for the commission anyways and so has the listing broker if they have one.
So basically you have no benefit to not using a buyers broker in your corner.
Investor · Sunnyvale, CA · Member since 2015 · 39 posts · 9 votes
9y
Thank you very much @Joel Owens. Do you go with your client to look at the property? We are using a commercial broker but he doesn't go with client to visit property. What should we look for when visiting the site? I understand that we just want to see with our eyes the inside and outside, traffic, kitchen and equipment. What else?
